[ 12.2 ] Fiscal and Monetary Policy [ 12.2 ] Fiscal and Monetary - - PowerPoint PPT Presentation

[ 12.2 ] Fiscal and Monetary Policy

[ 12.2 ] Fiscal and Monetary Policy

Learning Objectives

• Explain the major responsibilities of the Federal

Government for domestic economic policy.

• Describe the overall goals of the Federal

Government's actions in the economy.

• Explain how government fiscal policy influences

the economy at the national level.

• Explain how government monetary policy

influences the economy at the national level.

[ 12.2 ] Fiscal and Monetary Policy

Key Terms

• gross domestic product
• inflation
• deflation
• recession
• Fiscal policy
• John Maynard Keynes
• Monetary policy
• pen market operations
• reserve requirement
• discount rate
• Interest

[ 12.2 ] Fiscal and Monetary Policy

• Fiscal Policy: various means the government uses

to raise and spend money.

• Monetary Policy: process through which the

government can influence the nation’s economy through changes in the money supply and the availability of credit.

[ 12.2 ] Fiscal and Monetary Policy

Federal Government and the Domestic Economy

• The Federal Government’s fiscal, monetary, and

regulatory policies influence the economy at the national, state, and local levels.

• In addition to fostering competition and

entrepreneurship, both the executive and legislative branches help set fiscal and monetary policy.

• Despite the prominence of executive agencies (OSHA,

SEC, etc.) it is important to note that the government must continually balance the call for regulation with the equally critical demand for limited government involvement in the nation’s economic life.

The Federal Government and the Domestic Economy

• For the first 120 years or so of its existence, the Federal Government played only a very limited

role in the economy—whether at the local, State, or national level—and in the economic well- being of the American people. However, beginning in the early twentieth century, there were repeated economic “panics” and recessions.

• In the picture above, crowds gather at New York City’s American Union Bank during a 1931 run on

the bank. The Great Depression led to New Deal legislation that greatly increased the government’s role in banking.

The Federal Government and the Domestic Economy

• The Federal Reserve System (The Fed). [1913]
• Federal Funds Rate: an interest rate at which banks lend money to other banks
• n a daily basis.
• Raising interest rates makes money more expensive to borrow and CONTRACTS

the economy.

• Lowering interest rates makes money less expensive to borrow and EXPANDS

the economy.

• The Securities and Exchange Commission (SEC) [1934]
• Oversee the nation’s stock markets.
• Ensures corporations do not engage in such abuses as insider trading.
• Ensures publicly traded companies truthfully disclose their finances.
• Brings court actions against those who violate securities laws.
• The Department of Labor [1913]
• Occupational Safety and Health Administration (OSHA) [1971]
• Employment Standards Administration (ESA) [1971]
• Bureau of Labor Statistics (unemployment rate and consumer price index)
• Supporters: Rules and regulations are important to the protection of

American workers.

• Detractors: They are overly burdensome to business owners and

regulations should be scaled back to better allow free enterprise to

• perate.

The Federal Government and the Domestic Economy

Decisions made by the Fed have great impact on both the national and global economy. Analyze Maps What is the benefit of having regional banks as part of the decision-making process?

[ 12.2 ] Fiscal and Monetary Policy

Key Goals for the Economy

• The Federal Government seeks to achieve 3 key goals in

the economic realm.

• Full Employment
• Unemployment would equal 0%
• Unemployment rate as of November 1, 2019 was

3.6%

• Why would the unemployment rate rise when

the economy improves?

• Price Stability
• Limit inflation and deflation
• Economic Growth
• Gross Domestic Product continually increases.

Key Goals for the Economy

James Carville was the lead strategist for Bill Clinton's 1992 presidential campaign. Carville’s strategy recognized that voters were most concerned with the economy in that election year.

Key Goals for the Economy

As part of its attempt to control the GDP, the Federal Government watches the unemployment rate. Analyze Graphs From 2010 to 2013, was the GDP expanding or shrinking? How do you know?

How Fiscal Policy Influences the Economy

• Fiscal policy is a major tool with which both the executive and legislative branches of

the Federal Government seek to achieve broad economic goals.

• Fiscal policy consists of the government’s powers to tax and spend to influence the

economy.

• The President, aided by agencies such as the Council of Economic Advisors, often

makes specific recommendations with regard to the economy, while the legislative branch enacts laws to put fiscal policies into action. The executive branch then carries

• ut those laws through its various executive departments and independent agencies.

[ 12.2 ] Fiscal and Monetary Policy

How Monetary Policy Influences the Economy

• Monetary policy is another means by which the legislative and executive branches of

the Federal Government can influence the nation’s economy.

• Monetary policy involves the money supply (the amount of currency in circulation)

and the availability of credit in the economy.

[ 12.2 ] Fiscal and Monetary Policy

How Monetary Policy Influences the Economy

The Fed has a variety of tools at its disposal to influence the nation's economy. Analyze Charts Which

• f these strategies might produce the quickest results?

How Fiscal Policy Influences the Economy

President Obama signs the American Recovery and Reinvestment Act in 2009. At the time, he noted that 'Our American story is . . . about converting crisis into opportunity. . . .'

How Monetary Policy Influences the Economy

• Open Market Operations: a process that involves the buying and selling of

government’s securities, such as bonds, from and to the nation’s banks.

• Reserve Requirements: the amount of money that the Federal Reserve Board

determines banks must keep “in reserve” in their vaults or on deposit with one of the 12 Federal Reserve Banks.

• Discount Rate: the rate of interest a bank must pay when it borrows money from a

Federal Reserve Bank.

[ 12.2 ] Fiscal and Monetary Policy

How Monetary Policy Influences the Economy

According to this cartoon, the Fed has the same response to most situations. What effect should lowering interest rates have on the economy?

Quiz: The Federal Government and the Domestic Economy

Suppose the current federal funds rate is 5 percent, and the Federal Reserve changes it to 4.5 percent. In theory, why might this help the economy grow?

• A. People will be less likely to borrow money, which will grow the economy.
• B. The amount of credit in the economy will decrease.
• C. Money will be less expensive, so more companies will borrow and invest.
• D. Lower interest rates usually lead to lower prices.

Quiz: Key Goals for the Economy

If the economy is not growing, one reasonable conclusion would be that

• A. federal spending should be cut.
• B. the economy is in the midst of a recession.
• C. taxes should be raised.
• D. full employment has been achieved.

Quiz: How Fiscal Policy Influences the Economy

How do tax increases slow economic growth?

• A. When federal taxes increase, so do State and local taxes.
• B. People get paid much less for the work they do.
• C. The government can't spend all the money it collects in taxes.
• D. People have less money to spend in the economy.

Quiz: How Monetary Policy Influences the Economy

What happens when the Federal Reserve lowers the discount rate?

• A. The government spends less money to help to boost the economy.
• B. Banks incur more interest which they must repay to the Federal Reserve.
• C. Banks will raise their interest rates, leading customers to borrow less.
• D. Banks can lower their interest rates, enticing customers to borrow more.

[ 12.3 ] Financing Government

[ 12.3 ] Financing Government

Learning Objectives

• Explain how the Constitution gives Congress the power to tax and at the same time

places limits on that power, as well as, how government taxation and regulation can serve as restrictions to private enterprise.

• Identify the sources of revenue of the U.S. government today, including both tax and

non-tax revenues.

[ 12.3 ] Financing Government

Key Terms

• progressive tax
• payroll taxes
• regressive taxes
• excise tax
• estate tax
• inheritance tax
• gift tax
• Customs duties

The Power to Tax

This text is mostly about fiscal policy—a subject that has a tendency to make most people’s eyes glaze over. It is, nonetheless, a matter of very considerable importance to everyone in the United States.

[ 12.3 ] Financing Government

The Power to Tax

Article 1-Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States…

[ 12.3 ] Financing Government

Direct v. Indirect Taxes

• A direct tax is paid directly by an individual or organization to the imposing
• entity. A taxpayer, for example, pays direct taxes to the government for

different purposes, including real property tax, personal property tax, income tax, or taxes on assets.

• Indirect taxes can be defined as taxation on an individual or entity, which is

ultimately paid for by another person. The body that collects the tax will then remit it to the government. But in the case of direct taxes, the person immediately paying the tax is the person that the government is seeking to tax.

• Examples: Import duties, fuel, liquor and cigarette taxes are all considered

examples of indirect taxes. By contrast, income tax is the clearest example

• f a direct tax, since the person earning the income is the one immediately

paying the tax. Admission fees to a national park is another clear example

• f direct taxation.

[ 12.3 ] Financing Government

Limits on the Power to Tax

4 Expressed Limits, and 1 Implied Limit

Expressed: Constitutional 1. Taxes can only be levied for public purposes, not for the benefit of private interest. 2. Prohibition of Export Taxes 3. Direct Taxes (except income taxes) must be equally apportioned (evenly distributed) among the states according to their population. 4. Indirect taxes must be set at the same rate in all parts of the country. Implied: McCulloch v. Maryland

• 5. The Federal Government cannot tax the States or any of their local

governments in the exercise of their proper governmental functions.

The Power to Tax

An engraver works on a model of a 2014 'America the Beautiful' quarter. The Federal Government is financed largely through revenue from various types of taxes.

The Power to Tax

The government’s actions over the years have affected the income taxes people pay. Analyze Charts Which of these actions might have generated benefits directly to taxpayers?

Federal Taxes Today

• Paying taxes is a responsibility of citizenship. Without citizens' tax

dollars, the Federal Government could not execute the nation's public policies or conduct the business of government.

• In the words of Oliver Wendell Holmes, Jr., taxes are “what we pay

for civilized society.”

• This comment represents one viewpoint on taxes—the notion that

tax-funded government services and programs, such as police, fire, public schools, and Social Security, have led to increased safety, reduced crime, increased levels of education, a reduction in poverty, and other tangible benefits.

• Others, however, argue that taxes represent undue government

interference with the economy and have a negative effect on both individuals and businesses.

• These differing viewpoints fuel the ongoing debates over which

types of taxes we should have and how high or low they should be set.

Federal Taxes Today

• Individual Income Tax: 16th Amendment (1913) Largest source of federal revenue

today.

• Corporate Income Tax: Each corporation pays a tax on its net income. (Non-profits are

exempt)

• Social Insurance Taxes: (OASDI, Medicare, Social Security, etc.)
• Excise Taxes: tax laid on the manufacture, sale, or consumption of goods and/or the

performance of services. (gas, oil, tires, tobacco, alcohol, firearms, telephone services, airline tickets, etc.)

• Estate Tax: Taxes on assets of someone who dies.
• Gift Taxes: Tax imposed on a gift from one living person to another. (Added in 1932 to

fix the loophole that allowed people to give away money or property before death and avoid the estate tax.)

• Customs Duties: Taxes laid on goods brought into the U.S. from other countries.

(Tariffs)

• Smoot-Hawley Tariff Act of 1930
• Reciprocal Tariff Act of 1934

Federal Taxes Today

A pay stub shows the amount of money in federal taxes withheld from one individual’s paycheck. They include personal income tax, Medicare tax, and Social Security tax.

Federal Taxes Today

With a progressive tax, as one’s income increases, so does the amount of one’s income taxes.

Federal Taxes Today

The portion of tax revenue from corporate income tax varies from State to State. Analyze Maps Which States do not levy a corporate income tax? Which State levies the highest?

Federal Taxes Today

Social Security revenue and cost data is shown as a percentage of gross domestic product.Analyze Graphs What is the significance of the lines crossing between the years 2010 and 2020?

Quiz: The Power to Tax

The Federal Government can tax a State if the State

• A. runs a for-profit business.
• B. charges fees for its services.
• C. brings in revenues over a certain amount.
• D. does not stay in compliance with federal regulations.

Quiz: Federal Taxes Today

Congress levies a variety of taxes under its constitutional power to tax. One example of a social insurance tax is

• A. gift tax
• B. Medicare tax
• C. excise tax
• D. inheritance tax