Macroeconomics:

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Unit 3

• Macroeconomics
• Branch of economics as a whole employment, GDP,
  inflation, economic growth, distribution of income

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Chapter 9Sources of Government Revenue

• Section 1
• Taxation

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Economic Impact

• Resource Allocation
• Affected factors of prod.
• How will people react to taxes?
• Behavior Adjustment
• May encourage/discourage activities
• Can deduct mortgage interest on taxes
• Cannot deduct on credit cards
• Sin tax alcohol, tobacco

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• Productivity and Growth
• Changes incentives to save, invest, and work
• What is too high for taxes?
• Do the rich get taxed too much or not enough?

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What makes an Effective Tax?

• Equity
• Fairness
• What is fair?
• Simplicity
• So both taxpayer and tax collector can understand
  them
• People tolerate more when they understand
• Income tax- complicated
• Sales tax- simple

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• Efficiency
• Easy to administer and be successful at
  generating revenue

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Two Principles of Taxation

• Benefit Principle
• Those who benefit from gov. goods and services
  should pay in proportion to the amount of
  benefits they receive
• Tax on gasoline (pay more if you drive more)
• Limitations
• People who get the greatest benefit are those who
  can least afford to pay for them
• Benefits are hard to measure

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• Ability to Pay Principle
• Belief people should be taxed according to their
  ability top pay regardless of the benefits they
  receive
• Two factors that this is based on
• Recognizes that societies cannot always measure
  the benefits derived from government spending
• It assumes that people with higher incomes suffer
  less discomfort paying taxes than people with
  lower incomes

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Types of Taxes

• Proportional tax
• Same rate on everyone
• Progressive Tax
• Higher rate on people with higher incomes
• Regressive Tax
• Higher tax on low incomes than high incomes

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Section 2

• Federal Tax System

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Intro

• Where does the Fed. Gov get most of their money
  from
• Individual Income tax
• Social Security Tax
• Corporate Income Tax

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Individual Income Tax

• Paid by payroll withholding
• Internal Rev. Service receives payment
• Must file tax return by April 15 to report
  earnings

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Progressive Income Tax

• Individual income tax is a progressive tax

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FICA Federal Insurance Contributions

• 2nd most important tax
• Both employees and employers pay to help with
  Social Security and Medicare
• Usually done by payroll tax

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Corporate Income Tax

• 3rd largest category
• Tax a corporation pays on its profits
• Tax separately because it is seen as a separate
  entity

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Excise

• Tax on the manufacture or sale of selected items
• Gas, alcohol
• Tend to be regressive taxes

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Estate and Gift Tax

• Tax on the transfer of property when a person
  dies
• Tax on donations of money or wealth and is paid
  by the person who makes the gift

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Customs Duties

• Tax on items brought in from other countries

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Misc. fees

• User fees charge for the use of a good or
  service
• Charges to use national parks

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Section 3

• State and Local Tax

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Intergovernmental Revenues

• Largest source
• Funds collected by one level of gov and
  distributed to another level
• Receive from Federal gov.

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Taxes and Fees

• Sales Tax
• 2nd largest
• Merchants give tax to agency on weekly or monthly
  basis
• 5 states do not have sales tax

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Retirement and Insurance

• State retirement and pension plans
• 3rd largest

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Income Tax

• 4th largest

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Local Revenue

• Intergovernmental Revenues
• Receive these from states and a small amount
  comes from Fed
• Property Taxes
• 2nd largest
• Real estate, buildings, furniture, autos, farm
  animals, stocks, bonds, bank accounts

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Other local Rev

• Public Utilities and state owned liquor stores
• 3rd largest
• Towns and cities have sales tax
• Collect money through hospital fees, income taxes

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Chapter 10Gov. Spending

• Section 1 The Economics of Spending

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Intro

• 2001 2.9 Trillion (Fed, State, Local)
• Spending increases in 1940why?

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Two Kinds of Spending

• Goods and Services
• Payments to disadvantaged Americans and other
  groups

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Goods and Services

• Buys planes, ships, buildings, parks, supplies,
  hire people, wages, salaries
• The more the gov provides, the more goods and
  services it consumes

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Transfer Payments

• The gov. receives neither goods nor services in
  return
• Social Security, welfare, unemployment, People
  with disabilities
• Grant in aid payment one level of gov. makes to
  another
• Highways and schools

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Impact

• Affect how resources will be used
• Influences how wealth is distributed
• Gov. competes with private sector
• Public colleges compete with private
• Military hospitals compete with private

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Section 2

• Expenditures

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Intro

• Fed Budget plan outlining revenues and
  expenditures for the coming year
• Mandatory Spending by law without annual
  approval (2/3)
• Soc. Sec., borrowed money, Medicare
• Discretionary must get approval
• Military, Coast Guard, welfare

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Establishing the Budget

• Fiscal year12 months (Oct. 1-Sept 30)
• Surplus
• Deficit

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What do they spend on?Largest to Smallest (2002)

• Social Security and disabled
• National defense
• Income Security
• Retirement for railroad and coal miners, civil
  service retire and disability, etc.
• Medicare
• Health
• Interest from borrowing money

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Section 3

• State and Local Spending

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Intro

• Some states have a law that forces them to have a
  Balanced Budgetcannot exceed revenues
• Mayors, city council, judge usually control local
  spending

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State

• Intergovernmental Exp.
• Sales tax
• Public welfare
• Insurance/retirement
• Higher education
• Highways

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Local

• Elem. And Secondary Education
• Utilities
• Hospitals
• Police
• Interest on debt
• Welfare
• highways

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Section 4

• Deficits, Surpluses, and the National Debt

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• Budgets are based on assumptions
• Must borrow if running a deficit
• Sells bonds and other forms to the public
• Federal Debt all outstanding fed bonds and
  other debt obligations the total amount borrowed
  from investors to finance the govs deficit
  spending

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Ch. 11

• Money

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• Without money we would be on a barter economy
  moneyless economy that relies on trade

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Functions of money

• Money any substance that serves as a medium of
  exchange, a measure of value, and a store of
  value
• Med. Of Exch accepted by all parties as payment
  for goods and services
• Measure of V. can be used to express worth that
  most understand
• Store of V allows purchasing power to be saved
  until needed

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Characteristics

• Portable
• Durable
• Divisible
• Limited Availability

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Money standard

• Mechanism designed to keep the money supply
  portable, durable, dividable and limited
• Legal tender fiat currency must be accepted in
  payments for debts
• The US is now on a inconvertible fiat money
  standard standard in which the fiat money
  supply cannot be converted into gold or silver by
  its citizens
• We have a managed supply the gov controls and
  quantity, composition and quality of the money
  supply

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Banking

• Fulfills two things provide a safe place for
  people to deposit their money and lend excess
  funds to people who need cash

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FED (Federal Reserve System)

• 1913
• Central Bank bank that can lend to other banks
  in times of need
• All national banks are required and state
  chartered banks are eligible to become members
• Members own stock (privately-owned banks own the
  FED

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• The Banking Act of 1933
• Created the Federal Deposit Insurance Corporation
  (FDIC) insure customer deposits in the event of
  a bank failure
• 100,000 max
• People worried less about the safety of deposits
  and reduce runs on banks

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Chapter 12

• Financial Systems

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Stock Market

• Investors buy equities represent ownership
  shares in corporations

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Market Efficiency

• Stock Prices vary
• Outstanding shares
• Number of shares
• How profitable is the company?
• Prospects for growth?
• Difficulty is how to decide what to buy and sell

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How to decide?

• Efficient Market Hypothesis stocks are priced
  about right and that bargains are hard to find
• You might get lucky or you might lose
• Portfolio diversification holding a large
  number of different stocks so increases in some
  can offset unexpected declines in others

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Securities Exchanges

• Places where buyers and sellers meet to trade
  securities
• People pay a fee to join and trading only takes
  place on the floor

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New York Stock Exchange

• Oldest and largest
• 1400 seats
• Members pay millions for each seat
• Lists stocks of 3000 plus companies
• Firms must meet requirements

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American Stock Exchange

• 1000 stocks
• Companies are smaller than NYSE

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Regional Exchanges

• Chicago, Pacific, Philadelphia, Boston, Memphis
• Exchanges were either too small or too new to be
  listed on NYSE or AMEX

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Global Exchanges

• Sydney, Tokyo, Hong Kong
• Computer technology and electronic trading

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Over the Counter Market (OTC)

• Majority are traded by this method
• Traded in a computer network (National Market
  System)
• Securities are listed in a network called the
  National Market System (NMS)
• Members of the OTC belong to the National
  Association of Securities Dealers (NASD)
• National Association of Securities Dealers
  Automated Quotation (NASDAQ) is the listing that
  provides info on stocks that this group trades

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Stock Performance

• Dow-Jones Industrial Average
• Most popular
• Average closing price of 30 active stocks
• Standard Poors 500 (SP 500)
• Uses the price changes of 500 representative
  stocks

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Bull Market

• Strong market
• Prices move up for several months or years

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Bear Market

• Mean market
• Prices drop for several months or years

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Futures

• Spot transactions made immediately
• Futures exchange takes place later on
• Usually done with grain, livestock
• Options like futures but you have to option to
  back out

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Economic Performance

• Ch. 13

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Measuring Nations Output

• Gross Domestic Product (GDP) dollar amount of
  all final goods and services produced within a
  countrys borders in a year
• Single most important measure of the economys
  overall performance
• 14.58 Trillion (2008)
• National Income Accounting Economist devised
  this to keep track of performance

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GDP (Continued)

• Multiply all final goods and services produced in
  a 12 month period by their prices, then add them
  up to get total dollar amount
• Things not counted
• Intermediate products products used to make
  other products
• Secondhand sales used goods
• Nonmarket goods transactions that do not take
  place in market it is difficult to measure
• Ex. Your own lawn care, or maintenance

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Gross National Product

• The dollar value of all final goods, services,
  and structures produced in one year with labor
  and property supplied by a countrys residents
• GNP is based on GDP
• GNP measures the income of all Americans whether
  the goods and services are produced in the US or
  other countries
• GNP is 1 of 5 measures included in the National
  Income and Products Accounts (NIPA)

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Net National Product

• GNP less depreciation
• Depreciation the capital equipment that has
  worn out or become obsolete

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National Income

• Income that is left after all taxes (except
  corporate profits tax) are subtracted from the
  NNP
• Excise, property, licensing, custom duties, and
  general sales tax

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Personal Income

• Total amount of income going to consumers before
  individual income taxes are subtracted

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Disposable Personal Income

• Total income the consumer sector has at its
  disposal after personal income taxes
• What consumers are able to spend

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Economic Sectors and Circular Flows

• Several parts receive various components of
  national income and use to purchase the total
  output

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Consumer Sector (Private)

• Largest
• Made up of a basic unit called the household

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Investment Sector (business)

• Proprietorships, partnerships, and corporations
• The productive sector for bringing the factors of
  production together to produce output

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Government (Public)

• All levels of government

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Foreign Sector

• All consumers and producers outside the US
• Does not have a source of income specific to it
• Represents the difference between the value of
  goods sent abroad and the value of goods
  purchased from abroad

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Chapter 14

• Economic Instability

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Business Cycles

• Systematic ups and downs of real GDP
• Phases
• 1. Recession real GDP declines for two
  consecutive quarters (begins when economy peaks)
• It ends when the economy reaches a trough
  (turnaround point)
• 2. Expansion period of recovery from a
  recession
• Continues till it reaches a new peak
• Trend Line if there were no periods of recession
  and expansion
• Depression-- if recession becomes very severe
  with many people out of work, shortages, and
  excess capacity in manufacturing plants

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Great Depression

• Oct. 29, 1929 Black Tuesday
• 25 percent of people were unemployed
• No FDIC to insure banks
• Bank Holiday declared to stop runs on banks

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Causes of G.D.

• Uneven distribution of Income
• Easy and plentiful credit
• Global Conditions
• High American tariffs

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Causes of Business Cycles

• Capital Expenditures
• Businesses expand and then pull back by laying
  off
• Inventory Adjustments
• Cut back on signs of slowing and then build back
  up which causes GDP to fluctuate
• Innovation and Imitation
• Gain edge on competition and they must imitate to
  keep up. Eventually, the playing field is even
  and there is no need to innovate
• Monetary
• Credit and loan policies of the FED
• Low rates cause more borrowing, in the long run,
  rate will go back up because of demand and people
  stop borrowing
• External Shock
• Increases in oil prices, wars, conflicts

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Predicting Cycles

• Using economic models

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Unemployment

• Section 2

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Rate

• People available for work who make an effort to
  find a job
• Number of unemployed divided by the total number
  persons in the civilian labor force

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Full Employment

• Does not mean zero unemployment
• The lowest possible rate with the economy growing
  and all factors of production being used as
  efficient as possible
• 4-5 percent

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Inflation

• Section 3

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Inflation and Deflation

• Rise in the general level of prices
• The decrease in the general prices

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Causes

• Demand of goods causes shortages
• Government deficit spending
• Rising input cost drive up cost of products
• Monetary Growth money supply grows faster than
  real GDP
• Extra money not spent causes prices to go up
• Most popular reason

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Consequences

• Dollar buys less
• Changes spending habits
• Causes people to speculate in investments
• Alters the distribution of income

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Chapter 15The FED and Monetary Policy

• Section 1
• FED

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Structure of the FED

• Private Ownership
• Owned by membership banks
• Own shares of stock like a corporation
• National Banks must be members

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• Board of Governors
• 7 members
• Appointed by president
• Approved by the Senate
• Regulatory and supervisory agency

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• Fed Reserve District Banks
• 12 Banks who is responsible for a district
• 25 additional banks
• Supervised by the Fed Reserve Board in Washington
  D.C.
• Carry out many of the actions normal banks do

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• Federal Open Market Committee
• Makes decisions about the growth of the money
  supply and level of interest rates
• 12 members
• Meets 8 times a year to review economy and make
  decisions
• The Feds primary monetary policy making body

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• Advisory Committees
• 3 committees that advise the Board of Gov.
  directly
• Fed. Advisory Council
• Representatives from 12 district banks
• Advice on overall health of economy
• Consumer Advisory Council
• Meet to discuss consumer credit laws
• Thrift Institutions
• Advise on thrift industry

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Regulatory Responsibilities

• State Member Banks
• Must maintain reserves against deposits
• Bank Holding Companies
• Fed controls corporations that own one or more
  banks
• International Operations
• 60 countries operate 500 branches in US
• Control about 20 percent of all banking assests
• Fed has authority to supervise and regulate
• Member Bank Mergers
• Must get the approval of the appropriate federal
  banking authority
• Fed has authority over state member banks

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Other Services

• Clearing checks, enforcing consumer legislation,
  maintaining currency and coins, and providing
  financial services to the government
• Figure 15.2 page 412
• Truth in Lending Act requires sellers to make
  complete and accurate disclosures to people who
  buy on credit
• Currency- paper component is made up of Fed
  Reserve Notes which is fiat and is printed by the
  Bureau of Engraving and Printing
• Coins are made by the Bureau of the Mint
• When banks need money, they call the Fed, when
  money cannot be used, they send it to the Fed and
  they destroy it

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Monetary Policy

• US is a fractional reserve system requires
  banks to keep a fraction of deposits as reserves
• 12 percent requirement must be kept in the vault
  as cash
• Banks lend excess money to others

100

• Easy money supply supply grows and interest
  rates fall to stimulate the economy
• Tight money supply Restricts money supply and
  rates go up to slow economic growth