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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
    Without revenue (money from taxes), the government
     would not be able to provide goods and services that
     we rely on (roads, schools, etc…)
 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 1,     Power To lay and collect
  Section 8 of the               Taxes, Duties, Imposts
  Constitution                   and Excises, to pay the
 This clause in the             Debts and provide for the
  Constitution is the basis      common Defense and
  for federal taxes              general Welfare of the
                                 United States; but all
                                 Duties, Imposts and
                                 Excises shall be uniform
                                 throughout the United
      Taxes and Fiscal Policy
 Examples of Taxes
   Import-Taxes on imported goods are called
      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
      Taxes and Fiscal Policy
 Employment taxes are made up of Medicare,
  Social Security, and Income taxes
   Income taxes make up about 50% of all Federal
    Government revenue
   In addition to the Medicare, Social Security, and
    Income taxes, your employer also pays an
    unemployment tax that goes towards an insurance
    policy for workers. If you are laid off, you can collect
    unemployment benefits
 Medicare and Social Security were authorized
  under the Federal Insurance Contributions Act
   Medicare taxes: national health insurance program that
    helps pay for health care for people over age 65
   Social Security taxes: helps to supplement the income
    of those over the age of 65 or disabled
      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
 Taxes are used as revenue and go
   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,
                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
 To expand the
  economy, we
  decrease taxes and  Government
                       Spending    Taxes
  raise government
          Fiscal Policy
                      Fiscal Policies that
                       are intended to
                       decrease demand
                       and output are called
                      To contract the
Taxes   Government     economy, we
         Spending      increase taxes and
                       decrease government
                   National Debt
 Contractionary fiscal              Expansionary fiscal policy
  policy results in a surplus         results in a deficit budget
  budget                             Deficit budget means that
 Surplus budget means                we are taking in less
  that we receive more                revenue than we are
  revenue that we are                 spending
  spending                           We have to borrow to
 Our national debt remains           cover our spending which
  the same because we put             increases our National
  the surplus towards the             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
 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
          Types of Money
 Commodity Money
 Representative Money
 Fiat Money
       Functions of Money
 The functions of
 money are to be:
  Medium of
  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
           Money must be
            familiar, divisible, and
            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

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