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					UNIT 6 CONCEPTS
               FISCAL POLICY

Fiscal Policy is the use of government
 spending and revenue collection to influence
 the economy
Fiscal Policy is controlled by the Legislative
 Branch (Congress)
Congress and the Executive Branch work
 together to formulate a budget for the Federal
 Government
               FISCAL POLICY

There are two main tools of Fiscal Policy,
 taxes and government spending
A tax is a required payment to the local,
 state, or Federal Government
  The income received by a government from taxes is
   called revenue
  Income taxes make up about 50% of all Federal
   Government revenue
Government Spending (G) is spending by the
 government for things such as defense,
 transportation, energy, education, etc…
         TAXES AND FISCAL POLICY

 Congress is granted the    The Congress shall have
  power to tax in Article     Power To lay and
  1, Section 8 of the         collect Taxes, Duties,
  Constitution                Imposts and Excises, to
 This clause in the          pay the Debts and
  Constitution is the         provide for the common
  basis for federal taxes     Defense and general
                              Welfare of the United
                              States; but all Duties,
                              Imposts and Excises
                              shall be uniform
                              throughout the United
                              States;
        TAXES AND FISCAL POLICY

Regressive- A smaller percentage of income
 is taken in taxes as income increases
  Example: Sales Tax
Progressive-A larger percentage of income is
 taken in taxes as income increases
  Example: Income Tax
Flat (proportional)- A constant percentage of
 income is taken in taxes as income increases
  Example: Flat Tax
        TAXES AND FISCAL POLICY

              Jose earns       Ashley earns Allen earns
              $50,000          $75,000      $100,000
              annually         annually     annually
Regressive    5% of total      5% of total      5% of total
              purchases,       purchases,       purchases,
              $2000 or 4% of   $2750, or 3.6%   $3250 or 3.25%
              income           of income        of income
Progressive   10% of income, 15% of income,     20% of income,
              or $5000       or $11,250         or $20,000


Flat          10% of           10% of           10% of
              income, or       income, or       income, or
              $5,000           $7,500           $10,000
        TAXES AND FISCAL POLICY

Examples of Taxes
 Import-Taxes on imported goods are called
  tariffs.
   Tariffs raise the price of foreign goods and
    help to keep the price of American products
    competitive
 Excise-A general tax on the sale or
  manufacture of a specific good or service
   Federal excise taxes include gas, cigarettes,
    alcohol, telephone, etc…
 Employment-Taxes deducted from your
  paycheck
        TAXES AND FISCAL POLICY

Taxes are used as revenue and go towards
  Local taxes go towards:
   Local schools, Law enforcement, Fire
    Department, Parks, Libraries, etc…
  State taxes go towards:
   Public universities and schools, public
    safety, highways, public hospitals, etc…
  Federal taxes go towards:
   Social Security, Medicare, Defense,
    Transportation, Veterans Benefits,
    Agriculture, etc…
                  FISCAL POLICY

Two Main Types of Fiscal Policy
Automatic Fiscal Policy
  Built in stabilizer
  Meant to lessen the blow of contractionary and
   expansionary phases
  Examples:
    Unemployment Compensation
    Taxes
    Medicare
Discretionary Fiscal Policy
  Requires an act of Congress (Legislative Branch)
  Two types of discretionary fiscal policy
    Expansionary
    Contractionary
    FLAWS OF DISCRETIONARY
        FISCAL POLICY
From start to finish, it could take over a year
 to implement an expansionary or
 contractionary fiscal policy
  Recognition problem
    We don’t recognize that we are in a problem until there has
     been positive or negative growth for two quarters (6
     months)
  Getting a law passed
    Must get both parties to agree to a bill
    Has to pass through the Senate and the House
  Implementing the policy
    Once the President has signed a law, it is up to the
     Executive Branch to implement it
              FISCAL POLICY

Fiscal Policies that
 are intended to
 increase demand
 and output are
 called Expansionary
To expand the
 economy, we
 decrease taxes and     Government
                                     Taxes
 raise government        Spending
 spending
EFFECT ON AGGREGATE DEMAND

 PL                   AS




 PL1
 PLe                         AD2

                       AD

            Qe   Q1        GDPr
          FISCAL POLICY

                     Fiscal Policies that
                      are intended to
                      decrease demand
                      and output are
                      called
                      Contractionary
Taxes   Government   To contract the
         Spending     economy, we
                      increase taxes and
                      decrease
                      government
                      spending
EFFECT ON AGGREGATE DEMAND

 PL                 AS




 PLe
 PL1
                      AD
                   AD2
           Q1 Qe       GDPr
              NATIONAL DEBT

The national debt is the total amount of
 money the federal government owes
The National debt is owed to people that hold
 US Treasury Bonds, bills and notes.
Most of our national debt is owned by the
 Federal Reserve and Federal Agencies
As of November 2, our national debt is
 approximately $13,671,000,000,000
                    NATIONAL DEBT

 Contractionary fiscal             Expansionary fiscal
  policy results in a                policy results in a
  surplus budget                     deficit budget
 Surplus budget means              Deficit budget means
  that we receive more               that we are taking in
  revenue that we are                less revenue than we
  spending                           are spending
 Our national debt                 We have to borrow to
  remains the same                   cover our spending
  because we put the                 which increases our
  surplus towards the                National Debt
  National Debt
   If we put the $ towards the
    debt, we would be putting
    money into the economy
    which is what we are trying
    to fight with contractionary
    fiscal policy
            WHAT IS MONEY?


Money is any item that is generally accepted
 in payment for goods and services
Throughout history, a wide variety of items
 have served as money.
These include gold, silver, large stone
 wheels, tobacco, animal teeth, cattle, metal
 coins, paper bills, and checks
All of these types of money should be judged
 on how well they accomplish the functions of
 money
            FUNCTIONS OF MONEY

The United States
 has a Fiat money
 system.
  This means that our
   money has value
   because our
   government says it
   does
The functions of
 money are to be:
  Medium of exchange
  Unit of account
  Store of value
             MEDIUM OF EXCHANGE


 To be a good medium of exchange:
    money must be accepted by people when they buy
     and sell services
    Money should be portable
       Easily carried from place to place
    Money should be divisible
       So that large and small transactions can be made
    Money should be uniform
       So that a particular unit, like a dollar, represents
        the save value as every other dollar
UNIT OF ACCOUNT

        To be a good unit of
         account, money
         must be useful for
         quoting prices
          Money must be
           familiar, divisible, and
           accepted
            STORE OF VALUE

To be a good store of value:
 Money must be durable so it can be kept
  for future use
 Money must have a stable value so
  people do not lose purchasing power if
  they use the money at a later time
    MEASURING THE MONEY SUPPLY

The Federal Reserve must track of the money
 in circulation
M1: M1 is the money that people can easily
 access (liquid). M1 includes currency in
 circulation, demand deposits, traveler’s
 checks, and other checkable deposits.
M2: M2 is M1 PLUS savings accounts, small
 time deposits, and money market mutual
 funds. M2 is made up of money that is not
 liquid, it is not easily accessed.
To control the money supply, the Federal
 Reserve Bank tries to control the amount of
 money in M1 and M2.
         FEDERAL RESERVE

Power to coin money was given to
 Congress in the Constitution
Congress created the Federal
 Reserve (Fed) in 1913 to create
 order and confidence in our
 monetary system
Since its creation, the Fed’s
 mission has grown to include
 helping maintain a stable, healthy
 and growing economy
             FEDERAL RESERVE

The Federal Reserve system is overseen by
 the Board of Governors
  Current Chairman is Ben Bernake
  7 members
  Members are appointed by the President and serve
   14 year terms
The FOMC is a committee that advices the
 Federal Reserve on setting interest rates and
 Open Market Operations
There are twelve district reserve banks
  We are in District 11 and our head bank is in Dallas
FEDERAL RESERVE DISTRICTS
FEDERAL OPEN MARKET
     COMMITTEE
         The FOMC is the group
          that establishes
          monetary policy
           Made up of seven
            governors and the 12
            Reserve Bank Presidents
           Fed Chairman heads the
            committee
             Regularly reports to
              Congress
           5 of the 12 Reserve
            Bank presidents have
            voting authority
      FEDERAL OPEN MARKET
           COMMITTEE
The committee makes decisions that affect
 the amount of available money and credit
As the money supply grows, so does the
 demand for goods and services
IF there is an indication that inflation is
 threatening purchasing power, the Fed may
 need to slow the growth of the money supply
If the money supply and the demand for
 goods decrease, people buy less and prices
 fall. The Fed may need to help the growth of
 the money supply
         FEDERAL RESERVE BANK

 The Fed operates independently within the
  government
    As with any corporation, the Fed has stockholders
    All nationally chartered banks hold stock in the
     Federal Reserve
       State bank may choose to join and own stock
    Unlike public corporations, banks cannot sell or
     trade their Fed stock
    Stockholders also do not control the fed
       They elect six of the nine board members of the
        Reserve Bank in their district
   RESPONSIBILITIES OF THE
   FEDERAL RESERVE BANK
 Banking
  Supervision
 Financial
  Services
 Monetary
  Policy
BANKING SUPERVISION

           The Fed works with
            other government
            agencies to make sure
            banks follow the rules
            and laws
           The Fed monitors banks
            to ensure their safety
            and soundness so that
            the public’s confidence
            remains high
           If the Fed discovers any
            problems, they will
            require the bank make
            corrections
               FINANCIAL SERVICES

 The Fed is referred to
  as the “banker’s bank”
  because it provides
  essentially the same
  service to banks that
  banks to provide to
  consumers
 The Fed is also the U.S.
  government’s bank
   The Fed maintains
    accounts for the Treasury
    Department
              MONETARY POLICY
Monetary policy is
 action taken by the
 Federal Reserve to
 influence the
 economy by adjusting
 the money supply
  Basically, controlling
   the amount of money in
   circulation
The Fed is dependent
 on developing and
 implementing a
 sound monetary
 policy
  THREE TOOLS OF MONETARY POLICY

To affect the money
 supply, the Fed uses
 three tools
  The Discount Rate
  The Reserve
   Requirement
  Open Market
   Operations
DISCOUNT RATE

       The discount rate is
        the interest rate the
        Fed charges
        financial institutions
        for short-term loans
         Changing the discount
          rate can inhibit or
          encourage a financial
          institution's lending
          activities
      THE RESERVE REQUIREMENT


The reserve
 requirement is the
 percentage of
 checking account
 deposits that
 financial instruction
 must set aside in
 reserve.
The Fed rarely
 changes the reserve
 requirement
      OPEN MARKET OPERATIONS

The Fed’s primary tool for fighting
 inflation or recession is open market
 operations
  OMO is simply the purchase or sale of
   U.S. Government securities
When the Fed determines that too much
 money are credit are available, they will
 sell securities
If the Fed determines that the too little
 money and credit are available, they will
  EXPANSIONARY MONETARY POLICY

Also called loose
 monetary policy
Meant to expand the
 money supply
Used to fight a
 recession             Discount   Reserve
                         Rate     Requirement


                          BUY BONDS
         EFFECT ON THE MONEY SUPPLY
Nominal                       Supply of
Interest                      Money
Rate
                                    S2




   IRe

    IR1                                   Demand
                                          for
                                          Money

                         Qe    Q1
                                Quantity of
                                Money
 CONTRACTIONARY MONETARY POLICY

Also called tight
 monetary policy
Meant to contract
 the money supply
Used to fight
 inflation           Discount   Reserve
                       Rate     Requirement


                        SELL BONDS
           EFFECT ON THE MONEY SUPPLY
Nominal                    S2        Supply of
Interest                             Money
Rate


    IR1

   IRe

                                                 Demand
                                                 for
                                                 Money

                      Q1        Qe
                                       Quantity of
                                       Money

				
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