Fiscal Policy

1
Fiscal Policy
2
How are taxes collected

• Pay-as-you-earn
• Taxable income income on which you can be taxed
• Personal exemptions and deductions subtracted
  from gross income
• Withholding taking money from your pay check
• Paying Taxes
• Tax return 1040 form
• W-2 form from employer showing taxable income

3
Types of Common Federal Taxes

• Federal income tax progressive income tax based
  on tax brackets
• Corporate income tax subject to numerous
  deductions
• Federal Insurance Contributions Act (FICA)
• Requires withholding to fund Social Security and
  Medicare
• Unemployment taxes collected from employers

4
The Fiscal Cliff
5
Other types of Taxes

• Excise tax Consumer tax on a specific kind of
  merchandise, such as tobacco.
• Tariff Tax levied on imports to help protect
  the nations industries, labor, or farmers from
  foreign competition.
• Sales tax General tax on sales transactions,
  sometimes exempting food and drugs.
• Estate Tax tax on the total value of money and
  property when someone dies
• Value-added tax (VAT) on increased value of
  the product at each stage of production and
  distribution rather than just at the point of
  sale.
• Tax Incentive used to encourage or discourage
  behavior
• Tax expenditure Loss of tax revenue due to
  Federal laws that provide special tax incentives
  or benefits to individuals or businesses.

6
Government Spending

• Deficit vs. Debt
• Keynesian economics - Economic theory stating
  that government spending should increase during
  business slumps and be curbed during booms.
• The Federal Stimulus
• Laissez-faire economics Theory that opposes
  governmental interference in economic affairs
  beyond what is necessary to protect life and
  property.
• Balanced budget
• Distributive policy vs. Redistributive policy
• Types of Spending
• Direct benefit payments entitlements such as
  social security
• Discretionary spending
• government programs environment, transportation,
  assistance programs
• Defense spending

7
(No Transcript)
8
The Federal Reserve Systems 12 Federal Reserve
Districts make up the central banking system of
the United States

• All Nationally charter banks required to join
• State-chartered banks can join voluntarily

9

• Board of Governors
• Appointed by the president 14 year term,
  staggered
• Chairman 4 year term, renewable
• Ben Bernanke, Chairman of
• the Federal Reserve

• The Board of Governors
• 1) fixes the discount rate
• 2) raises or lowers the reserve requirement
• 3) puts money into the economy through open
  market operations
• Federal Open Market Committee
• Makes key decisions interest rates and growth of
  money supply

10
Functions of the Federal Reserve

• Government Service
• Governments Banker
• Issues Currency
• Regulating Banks
• Reserves
• Bank examinations
• Regulating the Money Supply
• Factors affecting demand for money
• Cash needed on hand
• Interest rates
• Price levels in the economy
• General level of income

11
The World Famous Rosen Model
12
Monetary Policy Tools

• Money Creation
• Money created through normal operations
• Money Multiplier formula
• Initial Deposit x 1/RRR
• Reserve Requirements
• Reduction of the RRR allows more loans, increase
  supply
• Increase in RRR requires higher reserves,
  decreases supply

• Setting rates
• Discount (Fed to Bank)
• Federal funds rate (bank to bank)
• Prime rate (Banks to top customers)
• Open Market Operations
• Buying government securities increases the money
  supply
• Selling government securities decreases the money
  supply