vocabulary monetary policy- conducted by the fed, involved either the increasing or decreasing the...
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Vocabulary Monetary Policy- Conducted by the Fed,
involved either the increasing or decreasing the amount of money in circulation.
Fiscal Policy- Involves the gov’t decisions on how to spend money and tax households
Direct Taxes- Taxes paid directly to the gov’t (income taxes).
Indirect Taxes- Taxes paid through another agent (sales tax).
Reserve Requirement- The amount of money banks must keep in the Fed.
Discount Rate- The interest rate at which the Fed charges member banks for loans.
Open Market Operations- The sale or purchase of US Treasury Bonds.
Fiscal Policy Fiscal policy involves
how the government chooses to spend money and tax households/businesses.
1st Part Taxation
Decreased taxes allows producers to spend more money on labor/capital and households have more disposable income.○ This increases
employment, production, and consumer demand
○ This also can lead to inflation
To deal with rising prices, governments will raise taxes
Taxes can either be direct (paid directly to the gov’t…income taxes) or indirect (collected through another agent…gas station)
Personal Income Tax○ Tax paid on a citizens
income Corporate Taxes
○ Taxes placed on businesses
Excise Taxes○ Taxes placed on items like
alcohol and cigarettes
Estate taxes○ Taxes placed on inherited
property Tariffs
○ Taxes placed on imports Regressive Taxes
○ % of tax one pays decreases as their income rises
○ Sales Tax Progressive Taxes
○ % of tax increases as their income rises
○ Income tax Proportional Taxes
○ Everyone pays the same %
2nd Part Government
Spending Money the
government takes in is called revenue
Deficit Spending○ Results when the
government spend more money than it takes in in taxes
Monetary Policy The FED
Conducts monetary policy and controls the amount of money in circulation
It does this in 3 ways…
1. Reserve Requirement% of money banks must keep in the FED (savings
account) What would happen if the FED raises the reserve
requirement?Banks would have less to lend thereby putting less money in
the economy and decreasing inflationThis is called “tight money policy”
What would happen if the FED lowers the reserve requirement?Banks would have more money to lend thereby increasing
inflationThis is called “easy money policy”
2. Discount Rate The interest rate that banks pay the FED to
borrow money The higher the Discount Rate charged
by the FED, the higher the interest rate charged by banks
What do higher interest rates encourage people to do?
○ Save, therefore decreasing the money supply
3. Open Market Operations The sale or purchase of U.S. Treasury Bonds
FED sells bonds, it lowers the money supply How? Money that is spent on bonds is money that is
not spent in the market. FED buys back bonds, it increases the
money supply How? People get back their investment with interest
and spending increases
Currency Currency was
developed to make trade easier. Backed by gold or silver.
(Commodity Money)
Fiat money is no longer back by gold. Has value b/c the gov’t
says so. Most of the world’s
money Has value because
people have confidence in it and the government stands behind it
Ponzi Scheme
Watch out for Ponzi schemes and identity theft.Investment ScamNever give out personal
information unless you can verify who is asking.
If you have a conflict with a business, contact:Federal Trade CommissionBetter Business Bureau
EQ: EXPLAIN HOW THE FED MAY CONTROL THE MONEY SUPPLY DURING THE DIFFERENT PARTS OF THE BUSINESS CYCLE?
Reflection HOW DOES THE GOVERNMENT USE TAXES TO
REGULATE THE ECONOMY? SUMMARIZE THE DIFFERENCE B/W REGRESSIVE AND
PROGRESSIVE TAXES HOW DOES GOVERNMENT SPENDING AFFECT THE
ECONOMY? IN WHAT 3 WAYS DOES THE FED CONDUCT
MONETARY POLICY AND CONTROL THE AMOUNT OF MONEY IN CIRCULATION?
What may the FED do to combat inflation? Demand banks keep more money in FED (reserve requirement) Raise the interest rate on the money banks borrow from the
FED (discount rate) Sell US Treasury Bonds (open market operations)