Fiscal Policy. How are taxes collected “Pay-as-you-earn” “Pay-as-you-earn” – Taxable income: income on which you can be taxed Personal exemptions and

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<ul><li><p>Fiscal Policy</p></li><li><p>How are taxes collectedPay-as-you-earnTaxable income: income on which you can be taxedPersonal exemptions and deductions subtracted from gross incomeWithholding: taking money from your pay checkPaying TaxesTax return: 1040 formW-2: form from employer showing taxable income</p></li><li><p>Types of Common Federal TaxesFederal income tax progressive income tax based on tax bracketsCorporate income tax subject to numerous deductionsFederal Insurance Contributions Act (FICA)Requires withholding to fund Social Security and MedicareUnemployment taxes collected from employers</p></li><li><p>The Fiscal Cliff</p></li><li><p>Other types of TaxesExcise tax Consumer tax on a specific kind of merchandise, such as tobacco.Tariff Tax levied on imports to help protect the nations industries, labor, or farmers from foreign competition.Sales tax General tax on sales transactions, sometimes exempting food and drugs.Estate Tax tax on the total value of money and property when someone diesValue-added tax (VAT) on increased value of the product at each stage of production and distribution rather than just at the point of sale.Tax Incentive used to encourage or discourage behaviorTax expenditure Loss of tax revenue due to Federal laws that provide special tax incentives or benefits to individuals or businesses.</p></li><li><p>Government SpendingDeficit vs. DebtKeynesian economics - Economic theory stating that government spending should increase during business slumps and be curbed during booms.The Federal StimulusLaissez-faire economics Theory that opposes governmental interference in economic affairs beyond what is necessary to protect life and property.Balanced budgetDistributive policy vs. Redistributive policy Types of SpendingDirect benefit payments entitlements such as social securityDiscretionary spending government programs: environment, transportation, assistance programsDefense spending</p></li><li><p>The Federal Reserve Systems 12 Federal Reserve Districts make up the central banking system of the United StatesAll Nationally charter banks required to joinState-chartered banks can join voluntarily</p></li><li><p>The Board of Governors 1) fixes the discount rate 2) raises or lowers the reserve requirement 3) puts money into the economy through open market operationsFederal Open Market CommitteeMakes key decisions interest rates and growth of money supply</p><p>Board of GovernorsAppointed by the president 14 year term, staggeredChairman: 4 year term, renewable</p><p> Ben Bernanke, Chairman of the Federal Reserve</p></li><li><p>Functions of the Federal ReserveGovernment ServiceGovernments BankerIssues CurrencyRegulating BanksReservesBank examinationsRegulating the Money SupplyFactors affecting demand for moneyCash needed on handInterest rates Price levels in the economyGeneral level of income</p></li><li><p>Monetary Policy ToolsMoney CreationMoney created through normal operationsMoney Multiplier formulaInitial Deposit x 1/RRRReserve RequirementsReduction of the RRR allows more loans, increase supplyIncrease in RRR requires higher reserves, decreases supplySetting ratesDiscount (Fed to Bank)Federal funds rate (bank to bank)Prime rate (Banks to top customers)Open Market OperationsBuying government securities increases the money supplySelling government securities decreases the money supply</p></li></ul>