Unit 5: The Government and the Economy

Topic 1:

Money and the Government

Where does money come from??

TAXES

Income taxes Tax based on the “income” a person earns

Americans pay an income tax to: 1. The federal government 2. The state government 3. The local government

These taxes appear on a person’s pay check stub The purpose of filing taxes at the end of the year is to

determine if a person has overpaid or underpaid their taxes

EXAMPLE OF PAYCHECK STUB

Countries with the highest income tax rates

Country Tax rate Kicks in at….

Aruba 58.9% $165,000

Sweden 56.6% $81,000

Denmark 55.4% $76,000

Netherlands 52% $72,000

Austria 50% $80,000

Belgium 50% $46,900

Japan 50% $217,000

United Kingdom 50% $231,000

Finland 49.2% $91,000

Ireland 48% $43,900

U.S. = 23rd; at 39.6% at $400,000 *Source: CNBC

Other Major taxes Americans pay

2. FICA tax (social security)

3. Sales tax- tax based on the sale of an item

4. Property tax- tax based on the value of property

• Stossel goes to Washington: segment 1(7:40)

State and Local revenue

Federal Government revenue

• Where does the Federal Government get its money???

Taxes fall into 1 of 3 types of categories:

• 1. progressive

• 2. regressive

• 3. proportional

• 1. Progressive - higher incomes pay a greater % of income

example: income taxes

$100,000 $45,000

28% tax rate 15% tax rate

pay $28,000 pay $6,750

• 2. Regressive - lower incomes pay a greater % of income

example: sales taxes

$100,000 $45,000

Spend $4500 in taxes Spend $4500

Pay 4.5% of income tax Pay 10% of income in tax

• 3. Proportional - all incomes taxed at same % rate Example: school tax

$100,000 $45,000

2% tax rate 2% tax rate

pay $2,000 pay $900

• Where does the State and local government spend money???

Where does the federal government spend money ?

• everything else includes education, veterans benefits, national resources, foreign aid, Immigration, response to natural disasters

Military spending around the world

http://www.sipri.org/research/armaments/milex/factsheet2010

What is the national debt???

• Debt occurs when government revenue (primarily from taxes) is less than government spending.

Therefore debt will rise whenever..– revenue falls– spending increases

Debt in the past decade

• 2001: $5.8 trillion• 2002: $6.2 trillion• 2003: $6.8 trillion• 2004: $7.4 trillion• 2005: $7.9 trillion• 2006: $8.5 trillion• 2007: $9.0 trillion• 2008: $10.0 trillion• 2009: $11.9 trillion• 2010: $13.6 trillion

• DEBT CLOCK

It would take 200,000 years to count to 1 trillion!!!!!

The National Debt: CNBC explains

• 1. What is the difference between deficit spending and the national debt?

• 2. What is the DEBT CEILING? • 3. If the government borrows $, how does it

get the money it needs? • 4. Who/what is the largest holder of U.S.

debt?

Countries with the largest debts

17-20

Countries with largest debt as compared to GDPs

How does the Government get the $ it borrows?

• People and businesses lend the government money when they buy SAVINGS BONDS

What is a government bond??? IOU from the government –

GOVERNMENT pays back with interest after a set time period

Ownership of the Debt

Topic 2: What does government do in a market economy?

Set the RulesProtect consumers Promote competition Correct for Externalities and Market Failures Provide public goodsPromote Economic Growth and Stability

The Roles of Government:Setting Rules/laws for the economy1.

Examples: – Setting minimum wage – Setting pollution standards

The Government protects Intellectual Property

• Intellectual Property includes: secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages)

Intellectual property is protected by: 1. Patents2. Copyrights3. Trademarks

Patents

• legal right to exclude anyone else from manufacturing or marketing an invention

• Last for 20 years.

Strange patents ???

• Anti-eating face mask • Gerbil shirt

Copyrights

protect written or artistic expressions - novels, poems, songs or movies.

Lasts for the life of the author plus 50 years.

Famous copyright cases

S. Victor Whitmill v. Warner Bros. Entertainment Inc.Tatoo (like Mike Tyson’s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.

The Happy Birthday SongThe copyright belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit

Can Yo u Name These Copyrighted Logos?? 1. 2. 3. 4.

5. 6. 7. 8.

9. 10. 11. 12.

13. 14. 15. 16.

17. 18.

Trademarks

Name, phrase, sound or symbol used in association with services or products.

Famous Trademarks

“You’re Fired!”

• “Fear the brow” • “Let’s get ready to rumble”

• “There’s an app for that”

• “BAM!”

Roles of the government:

2. protect consumers

Federal Regulatory Agencies: Agencies

set up by federal governmentto regulate (watch over) business

Federal Trade Commission

Regulates productwarranties andadvertising fraud Issues product recalls

Food and Drug Admin.

• Regulates the safety of foods,drugs

Federal Communication commission

• Regulates TV and radio broadcasting

Securities and Exchange commission

• regulates the stock market

Equal Employment

Opportunity Commission• Works to reduce workplace

discrimination

Environmental Protection

Agency • enforces environmental standards

Occupational Safety and

Health Administration

regulates workplace safety

Roles of the Government: 3. Promote competition

Why is it important to promote competition???

Video clip: high cost of generic drugs

Roles of Government: 4. Correct for Externalities

Externalities - the effect of a decision on a third party not taken into account by the decision maker.

2 TYPES of externalities: POSITIVE AND NEGATIVE

Negative Externality

• “Bad” for societyex. Pollution, smoking

Society wants LESS of these

Video example

Negative Externalities

What should the Government do???

Government will tax companies that create negative externalities

Positive Externalities

• “Good” for societyExample: Vaccinations, education

• Society wants MORE of these

Video Example

Positive Externalities

• What should the government do to get companies to produce MORE positive externalities???

Government will offer subsidies to firms that create positive externalities

Subsidy = Financial aid given to a company to produce a product

The Roles of Government5. Provide for Public Goods

Public goods include national defense, police, roads, education etc…

Public goods are NON-EXCLUSIVE

South Park and tragedy of the commons

Tragedy of the Commons

Resources that are shared by everyone are used at a rate that exceeds the resources’ sustainable limit. •Goods that are available to everyone (common resources) are often polluted/destroyed since no one has an incentive to keep them clean

•Ex: Over-fishing in the Ocean

Is there a solution to tragedy of the commons???

• Stossel: Public goods video clip

What is the problem with Public Goods???

• Lead to a FREE RIDER problem A situation where some people either

consume more than their fair share of a good, or pay less than their fair share

What is the problem with public goods???

Video examples: 20/20 Freeloaders segment #1 and #3

Segment #1 start at 1:18

Bailouts and Bull: segment #2 (6 minutes)

The Roles of Government

6. Promote economic growth and price stability

The government promotes growth and pricestability through FISCAL POLICY

Topic 3:Economic stability

In order to be stable, the economy needs:

1. Economic growth (increasing GDP)

2. Full employment (unemployment under 6%) 3. Price Stability (if prices rise, they do so by

only 4% or less)

The economy becomes unstable if:

1. Unemployment over 6% 2. Recession

3. Inflation

4. STAGFLATION = Recession and inflation occurs at same time

How does the government promote economic stability???

By using FISCAL POLICY: Policy that uses government spending

and taxation to stabilize the economy

• The government will implement FISCAL POLICY to “fix” the economy

Expansionary Fiscal Policy

• Implemented during RECESSION

• Goal is to SPEED UP economy without causing too much inflation

Video example of expansionary fiscal policy

How can the government speed up the economy????

1. Increase government spending (public goods, roads, schools etc.)

2. Decrease income taxes (Consumers will have more $, so they will

spend more)

* government can increase its spending, decrease taxes or do both

•Expansionary policy will result in a DEFICIT BUDGET

•Deficit Budget: the government spends more $ than what they take in

Contractionary Fiscal Policy

Implemented during INFLATION

Goal is to SLOW DOWN economy without causing recession

How can the government slow down the economy???

1.Decrease government spending

2.Raise personal taxes

• Government can decrease its spending, raise income taxes or both

• Contractionary Policy results in a SURPLUS BUDGET

• Surplus Budget: the government spends less $ than what they take in

Topic 4: The Multiplier Effect

Why do cities want the Superbowl in their stadium?

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The multiplier effects

• Anytime the government changes its spending or changes taxes, they have to account for the MULTIPLIER EFFECT

• 2 types of multipliers: spending multiplier tax multiplier

MULTIPLIER EFFECT

• Someone’s spending will always become someone else’s income

• The person who receives the income will turn around and spend it and the cycle continues

• Because of this there is a multiplied impact of spending on the economy.

Marginal Propensity to Consume(MPC)•How much people consume when there is a change in income.

MPC= Change in Consumption Change in Income

Examples: 1. If you received $100 and spent $50.2. If you received $100 and spent $80.3. If you received $100 and spent $90.

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Marginal Propensity to Save

MPS= Change in Saving Change in Income

(MPS)•How much people save when there is a change in income.

Examples: 1. If you received $100 and save $50. MPS? 2. If you received $100 and save $30. MPS?

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Why is this true?Because people can either save or consume

If MPC is .8, what is MPS? If MPS is .1, what is MPC?

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MPC + MPS = 1

How is Spending “Multiplied”?Assume the MPC is .9 for everyone Assume the Super Bowl comes to town a family spends $100 at Ashley’s restaurant Ashley now has $100 more income. Ashley will spend .9 and save .1 of this $100

Ashley spends $90 at Carl’s salon. Carl will spend .9 and save .1 of this $90

Carl spends $81 at Dan’s fruit stand. Dan will spend .9 and save .1 of this $81

Dan spends $72.90 at Ted’s sporting goods

***This continues until every penny is spent or saved

How multiplier effect works

• new income of $100: MPC = .9 * remember someone’s spending becomes

someone else’s income

Round income spending savings• 1 $100 $90 $10 • 2 $90 $81 $9• 3 $81 $72.90 $8.10

Spending multiplier

» If an increase in spending = more $ goes into the economy

1/MPS

» If a decrease in spending = less $ goes into the economy

- 1/MPS

Practice

• 1. If MPC is .8, what is the spending multiplier if spending decreases???

• 2. If the MPS is .1, what is the spending multiplier if spending increases???

The smaller the MPS, the greater the spending multiplier will be!!!

Example of Spending Multiplier Effect: spending multiplier X change in spending

If Spending increases by $3 million, and the MPC is .8 How much will the economy change by?

How figured: 1. find spending multiplier

1/MPS = 1/.2 = 5

2. Multiply the spending multiplier by the change in spending:

3 X 5 = $15

Economy will increase by a total of $15 million (3 X 5)

Tax Multiplier

• looks at the impact of taxes on the entire economy

If taxes go down: If taxes go down, people have more $ to spend MPC/MPS (if decrease in taxes)

If taxes go up: If taxes go up, people have less money to spend

- MPC/MPS (if increase in taxes)

Practice

• MPC is .9, and taxes go up, what is the TAX multiplier???

• MPS is .2, and taxes go down, what is the TAX MULTIPLIER???

Example of tax multiplierTax multiplier X change in TAXES

If the government decreases taxes by $50 million, and the MPC is .8 by how much will the economy change by?

How figured: 1. Find Tax multiplier

.8/.2 = 4

2. Multiple tax multiplier by change in taxes 4X50 = $200

economy will increase by $200 million

Practice #1

Spending decreases by $2 million and MPC is .8. •What is the spending multiplier in this example? -1/MPS = -1/.2 = -5 •What will be the impact on the entire economy? -5 X 2 = -10 million

# 2

Taxes increase by $1 million and MPS is .1.

•What is the tax multiplier in this example? -MPC/MPS = -.9/.1 = -9•What will be the impact on the entire economy? -9 x 1 = -9 million

#3

• Taxes decrease by $5 million and MPC is .8.

• What is the tax multiplier in this example? MPC/MPS = .8/.2 = 4 • What will be the impact on the entire

economy? 4 X 5 = 20 million

#4

Spending increases by $4 million and MPC is .9.

•What is the spending multiplier in this example? 1/MPS = 1/.1 = 10 •What will be the impact on the entire economy? 10 X 4 = 40 million