2. Government Spending The government currently spends roughly
$3trillion per year, a figure that can be brokendown into four
major components: direct benefit payments toindividuals, including
SocialSecurity, health, and welfareprograms; national
defense;Comparing Governments: GovernmentRevenue and Expenditures
3. discretionary spending including spending onthe environment,
transportation, criminaljustice, and other areas; and interest on
the national debt.Comparing Governments: GovernmentRevenue and
Expenditures 4. Figure 1 5. Figure 3 6. Taxes as a Source of
Revenue Taxesare payments made by individualsand businesses to
support governmentactivities. The individual income tax is the
federalgovernments biggest single source ofrevenue. The federal
income tax is levied on apersons taxable income,an individualstotal
income minus certain deductions andexemptions. 7. Taxes as a Source
of Revenue (cont.) Excise taxes are taxes on themanufacture,
transportation, sale, orconsumption of goods and the performanceof
services. Taxes levied on imported goods are calledcustoms duties,
tariffs, or import duties. An estate tax is a tax on property and
moneyleft after someone has died. 8. Borrowing for Revenue In
addition to collecting taxes, the federalgovernment borrows money.
The government borrows by selling federalsecuritiesfinancial
instruments thatinclude bonds, notes, and treasury bills.
Government borrowing to fund annualbudget deficits over time
creates thenational debt. The size of the national debt affects
thefederal budget and the economy. 9. Fiscal and Monetary Policy
The government can influence theeconomy in two main ways: Fiscal
policyinvolves using governmentspending and taxation to influence
theeconomy. Monetary policyinvolves controlling thesupply of money
and credit to influencethe economy. 10. Fiscal and Monetary Policy
(cont.) When the government increases spendingor reduces taxes, it
is likely to run a deficitbecause it must spend money that it
doesnot have. Since the 1930s, the United States has haddeficit, or
unbalanced, federal budgets. The Public Debt, 1940-2008 11. Figure
4 12. The Federal Reserve System The Federal Reserve System, known
asthe Fed, is the central banking system ofthe United States. When
banks need money, they borrowfrom the Fed. 13. The Federal Reserve
System (cont.) The United States is divided into 12 FederalReserve
Districts. Each district has one main FederalReserve Bank. Most
Federal Reserve Banks have branchbanks within their
districts.Federal Reserve Districts 14. Figure 5 15. The Federal
Reserve System (cont.) The Fed uses four main tools to control
thefinancial activities of the nations banks: The discount rateis
the rate the Fedcharges member banks for loans. The Fed can raise
or lower thereserverequirementthe money banksmust keep in their
vaults or on depositwith the Federal Reserve Banks. 16. The Federal
Reserve System (cont.) The Fed can put money into the economy by
buying government bonds on the open marketopen-market operations.
The Fed may sell government securities.
