Econ 2305 Exam 4 Study Guide Lectures 25 30 Overall Concepts Chapter 6 Government Budget Constraint Limit on government spending marked by the fact that every dollar the government spends transfers or uses should be provided by the user charges and taxes it collects Tax Base Value of goods and services wealth or incomes subject to taxation Tax Rate Proportion of tax base that must be paid to a government as taxes Marginal Taxation Change in taxes due divided by change in taxable income It is applied to the highest tax bracket of taxable income reached Average tax rate Total tax payment divided by total income paid in taxes Taxation systems Proportional Income does not matter same proportion applied in taxes Progressive Higher income more taxes paid Marginal tax rate is greater than average tax rate Regressive Higher income lesser taxes Marginal tax rate is lesser than average tax rate Federal Taxes Personal Income Tax Corporate Income Tax Local and State Taxes Sales Tax Two main tax theories Static Tax Analysis Positive relationship between tax rates and tax revenues Dynamic Tax Analysis Recognizes that tax base falls with ever higher tax rates negative relationship between tax rates and tax revenues Chapter 14 Budget Deficit Excess of government spending over government revenues during a given period of time Budget Surplus Excess of government revenues over government spending during a given period of time Balanced Budget Government spending is equal to the total taxes and revenues collected during a given period of time Public Debt Total Value of all outstanding federal government securities Ways to reduce government s red ink Increase Taxes Tax the Rich Reduce Expenditures Chapter 16 Fed tools Open market operations Changes in the reserve ratio Changes in the interest paid Discount rate charges Market price of existing bonds is inversely related to the rate of interest prevailing in the economy Monetary Policy affects the money supply Contractionary policy causes interest rates to rise which raises the international value of the dollar decreasing the imports and increasing exports Chapter 32 Comparative Advantage Ability to produce a good or service at a lower opportunity cost than other producers Increases free trade Only works when specialization occurs Imports and Exports Imports are paid for by exports Restriction on imports reduces exports Arguments against free trade Infant Industry argument Dumping Loss of domestic jobs Ways to restrict foreign trade Quotas Tariffs Chapter 33 Balance of trade Difference between exports and imports of physical goods Balance of payments A system of accounts that measures transactions of goods services income and financial assests between domestic households businesses and governments and residents of the world during a specific time period Foreign Exchange Market A market in which households firms and governments buy and sell national currencies Exchange Rate Price of one nation s currency in terms of another nation s currency Flexible Floating Exchange rate Rates that fluctuate according to the open market in response to supply and demand Appreciation Increase in the exchange value of one nation s currency in comparison to another nation Depreciation Decrease in the exchange value of one nation s currency in comparison to another nation