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Vocabulary

Vocabulary. Monetary Policy- Conducted by the Fed, involved either the increasing or decreasing the amount of money in circulation. Fiscal Policy- Involves the gov’t decisions on how to spend money and tax households Direct Taxes- Taxes paid directly to the gov’t (income taxes).

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Vocabulary

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  1. Vocabulary • Monetary Policy- Conducted by the Fed, involved either the increasing or decreasing the amount of money in circulation. • Fiscal Policy- Involves the gov’t decisions on how to spend money and tax households • Direct Taxes- Taxes paid directly to the gov’t (income taxes). • Indirect Taxes- Taxes paid through another agent (sales tax).

  2. Reserve Requirement- The amount of money banks must keep in the Fed. • Discount Rate- The interest rate at which the Fed charges member banks for loans. • Open Market Operations- The sale or purchase of US Treasury Bonds.

  3. Warm Up • How does the government get most of its revenue?

  4. Effects of Monetary Policy, Fiscal Policy, & the FED

  5. Fiscal Policy • Fiscal policy involves how the government chooses to spend money and tax households/businesses.

  6. 1st Part • Taxation • Decreased taxes allows producers to spend more money on labor/capital and households have more disposable income. • This increases employment, production, and consumer demand • This also can lead to inflation • To deal with rising prices, governments will raise taxes

  7. Taxes can either be direct (paid directly to the gov’t…income taxes) or indirect (collected through another agent…gas station) • Personal Income Tax • Tax paid on a citizens income • Corporate Taxes • Taxes placed on businesses • Excise Taxes • Taxes placed on items like alcohol and cigarettes

  8. Estate taxes • Taxes placed on inherited property • Tariffs • Taxes placed on imports • Regressive Taxes • % of tax one pays decreases as their income rises • Sales Tax • Progressive Taxes • % of tax increases as their income rises • Income tax • Proportional Taxes • Everyone pays the same %

  9. 2nd Part • Government Spending • Money the government takes in is called revenue • Deficit Spending • Results when the government spend more money than it takes in in taxes

  10. Monetary Policy • The FED • Conducts monetary policy and controls the amount of money in circulation • It does this in 3 ways…

  11. Reserve Requirement • % of money banks must keep in the FED (savings account) • What would happen if the FED raises the reserve requirement? • Banks would have less to lend thereby putting less money in the economy and decreasing inflation • This is called “tight money policy” • What would happen if the FED lowers the reserve requirement? • Banks would have more money to lend thereby increasing inflation • This is called “easy money policy”

  12. Discount Rate • The interest rate that banks pay the FED to borrow money • The higher the Discount Rate charged by the FED, the higher the interest rate charged by banks • What do higher interest rates encourage people to do? • Save, therefore decreasing the money supply

  13. Open Market Operations • The sale or purchase of U.S. Treasury Bonds • FED sells bonds, it lowers the money supply • How? • Money that is spent on bonds is money that is not spent in the market. • FED buys back bonds, it increases the money supply • How? • People get back their investment with interest and spending increases

  14. REFLECTION • HOW DOED THE GOVERNMENT USE TAXES TO REGULATE THE ECONOMY? • SUMMARIZE THE DIFFERENCE B/W REGRESSIVE AND PROGRESSIVE TAXES • HOW DOES GOVERNMENT SPENDING AFFECT THE ECONOMY? • IN WHAT 3 WAYS DOES THE FED CONDUCT MONETARY POLICY AND CONTROL THE AMOUNT OF MONEY IN CIRCULATION?

  15. Closing? • What may the FED do to combat inflation? • Demand banks keep more money in FED (reserve requirement) • Raise the interest rate on the money banks borrow from the FED (discount rate) • Sell US Treasury Bonds (open market operations)

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