PUP Notes Exam 2 Chapter 7 Concepts Inflation Economic growth Unemployment Balance of trade Deficit debt Why economic policy 09 30 2014 o Usually the primary concern among citizens o If the economy is bad Less tax money comes in Less ability to address other types of policy o Goal 1 Control inflation The rate at which the prices of goods and services is rising Measured by Consumer Price Index CPI A basket of all the goods and services purchased by an average household during the year Causes Consequences of Inflation Causes Amount of money in the economy Federal reserve More dollars chasing the same amount of goods Consequences Things are more expensive o Wages tend to be sticky o Fixed income Good for borrowers bad for lenders o Goal 2 Promote Economic Growth Usually measured by Gross Domestic Product GDP All the goods and services produced in a given year Private consumption investment government expenditure net exports GDP C I G NX GDP per capita per person Negative economic growth Recession A fall in GDP for two consecutive quarters 6 months Recession caused by 2008 financial crisis lasted about 18 moths Depression A decline in real GDP exceeding 10 or A recession lasting 2 or more years o Goal 3 Maintain High Employment Unemployed Out of work AND are actively seeking work last 2 months If you are not seeking work then you are not unemployed we do not count retired homeless those who choose to not have a job stay at home moms etc Labor Force employed unemployed Unemployment rate unemployment workers labor force X 100 Short comings of unemployment rate Discouraged workers Part time workers Underemployed workers Labor force participation rates for different groups o Goal 4 Maintain Positive Balance of Trade Balance of trade Exports Imports 0 Exports more than import Controversial Protectionists American competitiveness unfair trade Protect industries Comparative advantage higher economic Free trade growth o Goal 5 Managing Deficits and Debts Budget deficit The government spends more than it takes in from taxes during a given year Issue T bonds to cover the difference The accumulated amount of budget deficits over Debt time Policy tools o Two tools to achieve these goals Monetary policy The tools of the federal reserve controlling how much money is in the economy Buying and selling T bonds Fiscal Policy The sum of all taxing and spending policies Chapter 7 Concepts 09 30 2014 Fiscal Policy o Keynesianism o Supply side economics Budget process Entitlement Discretionary spending Capital Gains Tax Income Tax Effective Tax Rate o Effective tax rate taxes paid Capital Gains Tax o A tax on all investment income o A single low rate Lower than earned income Regressive tax o Capital gains tax now 15 Effective Tax rates o Some money earned wage income rich guy 40 tax rate o Some money is capital gains rich guy pays 15 tax rate o Total effective tax rate is somewhere between If most earning are capital gains then closer to 15 o Variables in making tax policy See page 245 of text all fair game Fiscal Policy o The sum of all taxing and spending policies o Setting the budget determines what taxing and spending will be like in the coming year o Benefits o Surplus Government spending taxes Government spending taxes Unbalanced Budget o Reasons Lawmakers like to provide goods but don t like to raise taxes to pay for them Can use the budget as a tool to control the macro economy Approach 1 Keynesianism o Government programs can stimulate the economy o GDP C I G NX Increase G and increase GDP o Counter cyclical Sluggish economy Economic stimulus run a deficit increase spending or decrease taxes Growing economy create budget surplus pay down the debt reduce inflation Approach 2 Supply Side Economics o Government spending does little to affect economy in short run Timing crowd out borrowing money from private sector given to public o Instead fiscal policy should focus on long run growth Low taxes incentives to invest Low taxes particularly for the rich who create jobs o Austerity trickle down economies Debt Limit borrow Problem framing o The maximum amount the US government is allowed to Debt limit in theory bind our hands so we spend less Consequences defaults on loans o Democrat congress should pay for the things they bought o Republican reign in government spending Fall 2013 government spending o Cost 23 24 billion nothing achieved o In March debt ceiling increased Republican Party and Debt Ceiling o Tension in Republican party Tea Party debt violated values and compromises long term growth Traditional short term more important o Last years debt limit battle In house all democrats voted to extend 28 republicans More in senate Budget process 1 assumptions and planning 2 agency budget development 3 OMB budget review 4 Congressional review 5 Budget execution and control Entitlement spending o Mandatory spending programs anyone who applies and matches a legislated list of criteria has a legal right to automatically receive benefits Social security Medicare Medicaid Unemployment compensation food stamps o 2 3 of federal budget o Over 90 of entitlement benefit spending goes to the elderly disabled or working households o elephant in the room no one wans to talk about these programs Discretionary spending o Spending in the government budget that is optional o Bills have been authorized by every year the congress has to decide how much money they will spend on the programs Tax structures o Tax structure is defined in relation to a persons total income Total income wage capital gains Capital gains investment income the amount you earn investing in real estate stock etc o Regressive taxes If those with higher total income pay a smaller of their incomes in taxes States tax Medicare social security capital gain o Progressive taxes You earn more you pay more Earned income Lessen income inequality Effective tax rate o The average rate at which income is actually taxed Effect tax rate taxes paid taxes income o Tax law is complex Statutory tax rates Different rates for different types of income Deductions The effective tax rates tells you how much was paid as a percentage of income Variables in making tax policy o Collectability o Fiscal neutrality o Buoyancy o Distributive effects o Visibility o Equity page 245 09 30 2014 Chapter 7 Concepts The Federal Reserve System Money Supply Tools of Monetary policy o Reserve requirement o Discount rate o Open market operations Monetary Policy o The federal reserve system
View Full Document
Unlocking...