economics unit 7

UTHS

Revenue

money earned by the government through collecting taxes.

Gross Domestic Product (GDP)

• the total value of all goods and services produced in a country.

• It measures the size and health of an economy

Individual Income Tax

• A tax on money people earn from different sources.

• Examples:

  • Wages from a job

  • Rent income

  • Investment earnings

  • Gambling winnings

Payroll Tax

• A tax taken from workers’ paychecks.

• Used to fund:

  • Social Security

  • Medicare

FICA

• Federal Insurance Contributions Act

• Requires employers and employees to pay payroll taxes.

• Funds Social Security and Medicare.

Social Security

• A government program funded by payroll taxes.

• Helps:

  • Retired people

  • Disabled workers

  • Families after the death of a worker

Medicare

Federal health insurance program for:

• People 65+

• Some younger people with disabilities

• People with permanent kidney failure

Corporate Income Tax

Tax on business profits.

Estate Tax

Tax on property transferred after someone dies.

Gift Tax

Tax on large gifts where the giver receives nothing in return

Property Tax

• Tax based on the value of land, homes, and buildings.

• Largest source of revenue for local governments.

Federal Taxes

Main sources:

1. Individual income tax (largest source)

2. Payroll taxes (Social Security and Medicare)

3. Corporate taxes

4. Estate and gift taxes

5. Tariffs

• Federal taxes usually equal about 17–20% of GDP.

• Income tax and payroll tax make up about 80% of federal tax revenue.

State Taxes

States collect:

• Sales tax

• Excise taxes

• Income tax

• Corporate income tax

• Business fees

Examples of state spending:

• Schools and universities

• Highways

• Hospitals

• Police and corrections

• Parks and recreation

Seven states do not have a state income tax:

• Alaska

• Florida

• Nevada

• South Dakota

• Texas

• Washington

• Wyoming

Local Government Taxes

Main source:

• Property taxes

Other sources:

• Sales taxes

• Hotel taxes

• Cigarette/alcohol taxes

Used for:

• Police and fire departments

• Libraries

• Hospitals

• Water systems

• Sewers

• Public services

Progressive Tax

• Higher-income people pay a higher percentage of their income.

• Example: Federal income tax.

Regressive Tax

• Everyone pays the same tax amount, so it affects lower-income people more.

• Example: Sales tax.

Proportional Tax

• Everyone pays the same percentage.

• Example: Medicare payroll tax.

Why Does the Government Collect Taxes?

The government collects taxes to:

• Protect citizens

• Provide public services

• Pay for programs like Social Security and Medicare

• Fund national defense

The Constitution gives Congress the power to tax in:

• Article 1, Section 8

• 16th Amendment allows income taxes

Equity

Fair and equal.

Simplicity

Easy to understand and follow.

Efficiency

Easy to collect and generates enough revenue.

Tax Incidence

who actually pays the cost of a tax.

Example:

• A soda company pays a tax.

• The company raises prices.

• Consumers pay more.

• The tax burden falls on consumers.

Mandatory Spending

Money the government is required by law to spend.

Examples:

• Social Security

• Medicare

• Medicaid

• SNAP

• Unemployment benefits

• Veterans’ benefits

Discretionary Spending

Money the government chooses how to spend.

Examples:

• Defense

• Education

• Scientific research

• National parks

• Foreign aid

Fiscal Policy

government decisions about taxes and spending.

Controlled by:

• President

• Congress

Expansionary Fiscal Policy

Used to help the economy grow.

Government:

• Increases spending

• Lowers taxes

Effects:

• More money available

• More jobs

• Increased production

Contractionary Fiscal Policy

Used to slow the economy.

Government:

• Decreases spending

• Raises taxes

Effects:

• Less spending

• Slower economic growth

Government Regulation

Government regulations exist to:

• Protect consumers

• Protect businesses

• Protect workers

• Protect the environment

Examples:

• Safety laws

• Environmental rules

• Antitrust laws

Negative Externalities

A negative externality happens when someone’s actions create harm for others who were not involved.

Example:

• Cars create pollution.

• Car companies and drivers benefit.

• The environment is harmed.

Government regulations can reduce negative externalities.

The Federal Reserve (The Fed)

The Federal Reserve is the central bank of the United States.

Created:

• 1913 through the Federal Reserve Act

Purpose:

• Keep the economy stable

• Control money supply

• Supervise banks

• Provide banking services

The Fed’s Three Main Functions

• Monetary Policy

  • Controls money supply and interest rates.

• Bank Supervision

  • Makes sure banks operate safely.

• Financial Services

  • Provides services to the government and banks.

Board of Governors

7 members chosen by the President.

Federal Open Market Committee (FOMC)

Makes decisions about interest rates and money supply

Federal Reserve Banks

12 regional banks.

Member Banks

Local banks connected to the Fed.

Monetary Policy

actions by the Fed to control the money supply and credit

The Fed’s goals:

1. Maximum employment

2. Stable prices

3. Moderate long-term interest rates

The Fed’s Dual Mandate

The two main goals are:

1. Maximum employment

   • Keep unemployment low.

2. Price stability

   • Keep inflation low and steady.

Reserve Requirements

• The amount of money banks must keep instead of lending.

Increase reserve requirement:

• Less money available

• Slows economy

Decrease reserve requirement:

• More money available

• Speeds economy

Discount Rate

• Interest rate the Fed charges banks for loans.

Higher rate:

• Banks borrow less

• Money supply decreases

Lower rate:

• Banks borrow more

• Money supply increases

Open Market Operations

• Buying and selling government securities.

Fed buys securities:

• Increases money supply

Fed sells securities:

• Decreases money supply

Three Tools of the Federal Reserve

1. Reserve Requirements

2. Discount Rate

3. Open Market Operations

Frictional Unemployment

People between jobs.

Structural Unemployment

Workers’ skills do not match available jobs.

Cyclical Unemployment

Caused by recessions.

Gas Prices

Gas prices are affected by many factors.

Main Costs:

• About two-thirds of gas prices come from crude oil.

• The rest comes from:

  • Taxes

  • Refining

  • Transportation

  • Marketing

Taxes

Federal and state gasoline taxes increase prices.

Refining Costs

Turning crude oil into gasoline.

Geopolitics

Conflicts or problems affecting oil supplies.

OPEC Production

OPEC decisions affect oil supply and prices.

Non-OPEC Production

Countries like the U.S., Canada, and Mexico produce oil.

Demand

Growing countries like China increase demand.

Location

Gas costs more farther away from refineries.

Exchange Rates

Currency values affect oil prices.

Weather

Extreme weather can increase prices.

Speculation

Investors predicting future prices can affect oil markets.

OPEC

Organization of Petroleum Exporting Countries

Created:

• 1960

Purpose:

• Coordinate oil production

• Protect oil producers

• Maintain stable oil prices

Current members:

• 13 countries

Important:

• The United States is not a member of OPEC.

• OPEC decisions affect worldwide oil prices.

Comparative Advantage Connection

Countries trade because:

• They cannot produce everything efficiently.

• They focus on what they produce best.

• They trade for other goods.