Unit 6 Economic

Proportional Tax

(flat) the tax rate stays the same for all amounts of the tax base

• ex: property taxes, sales tax

Progressive Tax

the tax rate increases as the tax base increases

• rich pay more

• ex: income tax

Regressive Tax

the tax rate decreases as the tax base increases

• ex: social security tax system

Government Budget

a financial plan for government spending and revenue collection

• covers a specific time period (usually one year)

Classical Economists

self-regulating nature of markets and the role of individual choices within economic systems

Keynesian Economists

government intervention can be effective in stabilizing the economy, especially during the recessions

• argue that government spending and tax policies can stimulate demand and boost economic activity

Discretionary Fiscal Policy

involves deliberate changes in government spending and taxation, made by policymakers, to influence the economy

Deficit vs Debt

Deficit: happens when the government spends more money than it takes in during a fiscal year

Debt: the cumulative amount of money the government has borrowed throughout our nation’s history

Medium of Exchange

enables us to carry out trade and commerce easily

Commodity Money

form of money that has some intrinsic value or alternate use

• gold or silver

Properties of Money

1. Acceptability (as payment)

2. Scarcity

3. Portability

4. Durability

5. Divisibility (easily divided into smaller amounts)

6. Uniformity (every dollar is the same)

Representative Money

a form of currency that has no inherent value itself but represents a claim on something of value, like a commodity or a bank deposit

Fiat Money

paper money decreed as legal tender, but not representing anything of intrinsic worth

• rather, money is accepted solely because we believe that it is worth something, and is backed by the “full faith and credit” of the US government

Federal Reserve System

America’s central bank

• congress gave the Fed enough power to act independently in regards to monetary policy

Discount Rate

the interest rate the Fed charges on loans to private banks

• this tool leads to the fed being known as the “lender of last resort”

• controlled by the board of governors

• Easy-money Policy: fed lower rate, which increases the money supply

• Tight-money Policy: fed raises rate, which decreases the money supply

Open-Market Operations

the buying and selling of government securities by a central bank, to influence the money supply and credit conditions in the economy (most used tool)

• easy-money policy: fed bond traders buy government securities, which increases the money supply

• tight-money policy: fed bond traders sell government securities, which decreases the money supply

M1

made up of:

• coins and bills (currency)

• checkable deposits (liquid assets)

• Travelers checks

M2

• all of M1

• somewhat liquid assets such as saving deposits, money market accounts, etc.

Monetary Policy

central bank/federal reserve policy aimed at regulating interest rates and the amount of money in circulation to influence the health and direction of the economy