Fiscal and Monetary Policy Test

Define tax:

A required payment to a local, state, or national government

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Which branch of government creates federal taxes?

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Legislative Branch or Congress

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What part of the constitution gives them this power?

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Article I Section 8

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Give two examples of limits on the government’s power to tax:

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A tax cannot bring in money that goes to individual interests \n

Federal taxes must be the same in every state \n

Congress cannot tax religious services \n

Cannot create a poll tax \n

Cannot tax exports \n

Cannot create a “head” tax: taxing every single person

What are the two ways economists describe taxes? \n

By how a tax is structured

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By what is being taxed

What are the three tax structures? DEFINE EACH OF THEM. \n

Progressive tax: a tax for which the percentage of income paid in taxes increases as income \n increases \n

Proportional tax: a tax for which the percentage of income paid in taxes remains the same as \n all income levels \n

Regressive tax: a tax for which the percentage of income paid in taxes decreases as income \n increases

The more inelastic the demand _______________________

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the more easily the seller can shift the tax to consumers

The more elastic the demand,__________________________

the more the seller bears the burden

taxes should be simple and easily understood

Simplicity

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governments should be able to assess and collect taxes without too much \n time or money

Efficiently

it should be clear when a tax is due, how much money is due, and how the tax should be paid

certainty

the tax system should be fair

Equity

What are the two ideas of how to measure the fairness of a tax? \n

Benefits-received principle: a person should pay taxes based on the level of benefits he or \n she expects to receive from the government

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\n Ability-to-pay principle: people should pay taxes according to their ability to pay

Tax on a person’s earnings

Personal income tax

Tax on a company’s earning

Cooperate income tax

Tax to help wage earners and to keep people with disabilities \n from working

Social security tax

Tax to pay for a national health insurance program for people \n over 65

Medicare tax

Tax for an insurance policy for workers who are laid off \n through no fault of their own

Unemployment Tax

A general revenue tax on the sale or manufacture of a good \n Ex. cigarette tax

Excise Tax

Tax on the state, or total value of the money and property, of a \n person who has die

Estate tax

Tax on the money or property that on living person gives to another

Gift tax

Tax on imported goods

Tariff

Fiscal Policy

The use of government spending and revenue collection to influence the economy

The federal budget reflects the nation’s

Priorities

What are the two types of spending in the federal budget?

Mandatory Spending: spending that must occur due to current laws.

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Discretionary Spending: spending that depends on Congress’ approval

What are the two ways the government can engage in expansionary policy?

a. Increase government spending \n b. Cutting taxes

What are the two ways the government can engage in contractionary policy?

Decreasing spending \n

Raising taxes

What do classical economists believe in?

There should be little to no government regulation because the market can regulate itself

What do Keynesian economists believe in?

The government can be a stabilizing force by influencing demand

What do supply-side economists believe in?

The government can be a stabilizing force by influencing supply

What are the three parts of the federal reserve system?

Board of governors

Reserve Banks

Federal open market committee

What created the federal reserve banking system?

Federal Reserve Act of 1913

What were the three main reasons the fed was formed?

Centralized National Authority

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Regional Independence \n

Setting Nation’s Monetary Policy

Define Monetary Policy

Actions and decisions to influence the supply of money in the economy

Define Money Supply

The amount of money available in the economy

Who conducts the monetary policy of the United States?

The federal reserve

What do reserve requirements tell banks

How much reserve money banks must have at all times

What happens to the money supply if the federal reserve increases reserve requirements?

The money supply contracts

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What happens to the money supply if the federal reserve decreases reserve requirements?

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The money supply expands

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What is the interest rate on loans from the Federal reserve called?

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Discount Rate

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What is the interest rate on loans between banks called?

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Federal Funds Rate

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The federal funds rate is always higher than the discount rate

True or False

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False

What happens to the money supply when the gap between the discount rate and the federal funds rate \n increases?

The money supply contracts

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What happens to the money supply when the gap between the discount rate and the federal funds rate \n decreases?

The money supply expands

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What is open market operations?

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The buying and selling of government securities (stocks or bonds) to alter the money supply

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What happens to the money supply when the Federal Reserve decides to sell bonds?

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The money supply contracts

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What happens to the money supply when the Federal Reserve decides to buy back bonds?

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The money supply expands

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What is the ultimate goal of the Federal Reserve when using all three tools of monetary policy?

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To fight inflation