Domestic Policy Test Flashcards
Federal Reserve
Nation’s central bank
Oversees banking system
Regulates the quantity of money in the economy
3 Primary elements of the Federal Reserve
- Board of governors
- Regional Federal Reserve Banks
- The Federal Open Market Committee
Board of Governors
7 members
Chairman is the most important
Appointed by the President and approved by the Senate
Staggered 14 year terms (vacancy every 2 years)
Chairman serves 4 years
Current Chairman of the Federal Reserve
Janet L. Yellen
Federal Reserve System
Made up of the Federal Reserve Board in Washington, DC
12 regional Federal Reserve Banks
Federal Open Market Committee
Main policy-making organ of the Federal Reserve System
Meets every 6 weeks to review the economy
Made up of Board of Governors, Pres. of New York Fed, and presidents of 4 other rotating Federal Reserve Banks (rotate yearly)
3 primary functions of the Fed
- Regulates banks to ensure they follow federal laws intended to promote safe and sound banking
- Acts as banker’s bank. Makes loans to banks
- Conducts monetary policy
Who conducts Monetary Policy
Federal Open Market Committee
Monetary Policy
The setting of the money supply by policymakers and the bank
Money supply
Refers to the quantity of money available in the economy
3 ways in which the Fed controls the money supply
- Open Market Operations
- Reserve Requirement
- Discount Rate
Open-Market Operations
Primary way the Fed controls the money supply
Purchases and sells US government bonds
Bonds to increase the money supply
Fed buys government bonds from the public
Bonds to decrease the money supply
Fed sells government bonds to the public
Reserves
Deposits that banks have received but have not loaned out
Fractional-reserve banking
Banks hold a fraction of the money deposited as reserves and lend out the rest
Reserve ratio
The fraction of deposits that banks hold as reserves
what happens when a bank makes a loan…
the money supply increases
Reserve requirement
the amount (%) of a bank’s total reserves that may not be loaned out
Increasing the reserve requirement decreases the money supply
Decreasing the reserve requirement increases the money supply
Money multiplier
the amount of money the banking system generates with each dollar of reserves
Discount rate
the interest rate the Fed charges banks for loans
Increasing the discount rate decreases the money supply
Decreasing the discount rate increases the money supply
Problems that the Fed faces
Cannot control how people chose to spend money
Cannot control the amount of money bankers chose to lend
Largest source of revenue for the Federal government
The individual income tax
Marginal tax rate
Sub of individual income tax
Tax rate applied to each additional dollar of income
Higher income families pay a larger percentage of their incomes in taxes
What type of tax is the marginal tax rate?
Progressive
Payroll taxes
Tax on the wages that a firm pays its workers
Social insurance taxes
taxes on wages that is earmarked to pay for Social Security and Medicare
FICA Taxes
Excise taxes
Taxes on specific goods like gas, alcohol, and cigs
Estate tax
Tax on the transfer of property when a person dies
Gift tax
Tax on donations of money or wealth
Paid by the person who makes the gift
Customs duties
Tax on goods brought into the country from another country
User fees
Charges levied for the use of a good or service
Budget surplus
An excess of government receipts over government spending
Does not happen often
Budget deficit
Excess of government spending over government receipts
State and local tax percent…
collect about 40% of taxes paid
Receipts
Sales taxes
property taxes
individual income
corporate income
What do state and local government spend their money on?
Education ($$$)
Public welfare
Highways
Tax Criteria
- Equity
- Efficiency
- Simplicity
equity
fairness
just cause fair does not does not mean equal
Tax loophole
Exceptions or oversights in the tax that allow some business to avoid taxes
Legal
How to tell if a tax system is efficient?
It raises the same amount of revenue at a smaller cost to the taxpayers
Imposes small deadweight loses and small administrative burdens
Deadweight losses
The reduction of the economic well-being of taxpayers in excess of the amount of revenue raised by the gov
Average Tax Rate (ATR)
Total taxes paid divided by total income
Marginal Tax Rate
The extra taxes paid on an additional dollar of income
Lump sum taxes
A tax that is the same amount for every person
Efficient
Problem: larger burden for the poor than the rich
Benefits principle
The idea that people should pay taxes based on the benefits they receive from government services
Ex: gas tax
Ability to pay principle
The idea that taxes should be levied on a person according to how well that person can shoulder the burden
vertical vs. horizontal equity
Vertical equity
The idea that taxpayers with a greater ability to pay taxes should pay larger amounts
people with higher incomes pay more
Propotional tax
One for which the high-income and low-income taxpayers pay the same fraction of income
Regressive tax
one for which high income taxpayers pay a smaller fraction of their income than do low-income taxpayers
Progressive tax
one for which high income taxpayers pay a larger fraction of their income than do low-income taxpayers
Horizontal equity
the idea that taxpayers with similar abilities to pay taxes should pay the same amount
Sin tax
taxes on items considered harmful
ex: drugs and alchohol
Luxury tax
Tax placed on goods that are deemed to be not necessary
ex: yachts, private jets
FICA
Federal Insurance Contribution Act
payroll tax that goes to social security
fiscal policy
Decisions made by Congress and the White House
Change spending and tax levels
expansionary fiscal policy
cut taxes
increase government spending
contractionary fiscal policy
increase taxes
cut government spending
expansionary monetary policy
increase money supply by buying bonds
decrease interest rates
contractionary monetary policy
decrease money supply by selling government bonds
increase interest rates
Property tax
tax on the value of property
usually real estate
FED creation date
1913
Followed a series of Bank failures
How to calculate the money multiplier?
1/reserve ratio requirement
Inverse of the reserve ratio
GDP-Gross Domestic Product
Currency value of all FINAL goods and services produced within a country in a given period
total income of nation
measure of economic growth and well being
What’s included in GDP?
- Consumption by households
- Investment by businesses and households
- Government expenditures by local, state, and federal government (roads and schools)
- Net exports
GDP=
how we measure it
consumption+investment+government spending+net exports
What is not included in GDP?
intermediate goods
used goods
black market
financial transactions
household production
Nominal GDP
GDP that is not adjusted for inflation. Value is shown in current prices.
Nominal=Not adjusted
Real GDP
Dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next
Increase in real GDP is an increase in economic growth
What does GDP not tell us?
Income distribution
non-monetary output or transactions
does not measure social well-being
not a true measure of standard of living
Intermediate goods
Used to produce another good
Ex: flour
Final goods
Produced for the consumer
Ex: cake
GDP wording “within a nation” meaning
Means that even if the company is headquartered somewhere else if it is made in the country it counts
Ex: Toyota factories in the US
Taxes effect on supply and demand
Taxes reduce both supply and demand
Market equilibrium price becomes higher than without tax
Quantity is lower than without the tax
