What should be the role of government in our economy?

• Discuss this with a partner.• Come up with 3 things

Basic goals of an economy

• Full employment• Low inflation (price stability)• Economic growth

There are 2 basic ways for the government to affect the economy

1. Monetary PolicyThis is the Federal Reserve

controlling the supply of money.

2. Fiscal PolicyThis is the GOVERNMENT actions of

TAXING and SPENDING.

How Can Fiscal Policy Influence the Economy?

Meet John Maynard Keynes(1883-1964)

When the facts change, I change my mind – what do you do, sir?”

Keynes’ Radical Idea:

Prices/Income

Quantity (Real GDP)

Aggregate Supply = All goods in the economy

Aggregate Demand= All demand (C+G+I+X)

Market for all goods and services in an economy

Govs. should reduce taxes and/or increase gov. spending during recessions to stimulate the economy.

During recessions, demand for goods decreases and GDP contracts

To compensate for decreased Business Investment and Consumer Spending…

Prices/Income

Quantity (Real GDP)

AS

AD = (C+G+I+X)

the Government should increase demand in one of two ways…Decrease Taxes (encouraging private spending) or Increase government spending even if they must borrow the money.

Q

P

Notice what happens to real GDP and Prices/Income

Alright, fine, but when does that money get paid back? No

free lunch, right?

I’m glad you asked! In times of economic

expansion, government should DECREASE Spending and INCREASE Taxes!

Wait a second…do you think a

government exists that would

decrease spending during the good

times?

Massive Gov. spending to fund WWII

And Taxes… what about TAXES ?• 16th amendment passed in 1913.• Prior to that our government had a surplus and most people

paid little to no taxes.

"In this world nothing can be said to be certain but death and taxes."--Benjamin Franklin (1706-1790), U.S. statesman and scientist. Letter to Jean-Baptiste Le Roy (November 13, 1789).

"There is no art which one government sooner learns of another than that of draining money from the pockets of the people."--Adam Smith (1723-1790), British philosopher and economist. Wealth of Nations (1776).

How do we tax? There are 3 tax structures, which one

do we use?1. Flat Tax-everyone pays the same

percentage of income2. Progressive-people with higher

incomes pay a higher percentage of their income

3. Regressive-people with lower incomes pay a higher percentage of their income

US- Progressive

Single

If taxable income is  

over

But not over

$0 $8,925 -10%

$8,925 $36,250 -15%

$36,251 $87,850 -25%

$87,851 $183,250 -28%

$183,251 $398,350 -33%

$398,351 $400,000-35%

$401,000 no limit – 39.6

Married

If taxable income is  over

But not over

$0 $17,850 -10%

$17,851 $72,500 -15%

$72,501 $146,400 -25%

$146,401 $223,050 -28%

$223,051 $398,350 -33%

$398,351 $ 450,000-35%

$450,001 no limit –39.6%

Our Progressive Tax Brackets for 2013

So, the money comes from the people’s income taxes. Who pays the most?

• Do the rich pay their “fair share?”• Does the middle class pay their share?

WHAT THE TOP 1%, 5%, 10%, 25% and 50% MAKE IN AMERICABased on the Internal Revenue Service’s 2010 database below, here’s how much the top Americans make: Top 1%: $380,354Top 5%: $159,619Top 10%: $113,799Top 25%: $67,280Top 50%: >$33,048

Do we spend more than we take in?Total 2013 spending was$ 3.5 Trillion

That leaves a projected Budget DEFICIT of …

$ 700 Billion or 4.5% of GDP

For 2013…Total Tax Receipts expected to be $ 2.8 Trillion

Where does it go?

http://www.usgovernmentspending.com/welfare_budget_2010_4.html#usgs302

Debt vs. DeficitWhat is the difference?

• Deficit is the overspending of the government on an annual basis. If we spend more than we take in, we are creating a deficit

• Debt is accumulated overspending• If we run a deficit for more than one year, the

total of the money we are overspending creates a DEBT

• For 2013 our deficit was $700 billion• Right now our debt is about $15.6 trillion

History of the debt?

SourceU.S. Federal Reserve

Total Debt = $ 16.5 TrillionUS GDP = $ 15.6 Trillion

Current Total Debt = 107% of GDP

Who racks up more debt? Democrats or Republicans?

US Total Debt compared to other countries

•If we wanted to pay down a billion dollars of the US debt, paying one dollar a second, it would take 31 years, 259 days, 1 hour, 46 minutes, and 40 seconds. To pay off a trillion dollars of debt, at a dollar a second, would take about 32,000 years.

•About a billion minutes ago, the Roman Empire was in full swing. (One billion minutes is about 1,900 years.)

•How ‘bout a TRILLION?

•A million seconds is 12 days.A billion seconds is 31 years.A trillion seconds is 31,688 years.

Tomorrow you get your chance to balance the federal budget!

Meet in the computer lab.