Unit V


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Unit V

  1. 1. WARM-UP Activity Marginal Tax Rates
  2. 2. Your Task « You will be put into groups of 4 – 5 « Each group will be assigned one type of tax « You will use your textbook and notes to complete a poster that follows all of the assignment. « You will then create a ‘poster’. « This poster will be used to ‘teach’ the class the information from your tax. « Your poster should include the tax, description, examples, pictures, and other unique techniques that will make it easy and exciting for your classmates to learn the information.
  3. 3. Groups/ Assigned Taxes Proportional Progressive Regressive  Katie  Zach Jaimie Jared Danielle Olivia Shailly Gianna Justin Andrew Brittany Demi Matt Julie Caitlin Proportional Progressive Regressive  Kayla  Becky  Dave Alex Kate Allan Alexa Jake Tom Robyn Heather Kelly Caitlin
  4. 4. Groups/ Assigned Taxes Proportional Progressive Regressive Stephanie Chris Jeanette Nick D. Kristine Meg Emily Ryan Marie Nick M. Brooke Mike Proportional Progressive Regressive  Brittany Steve Zack Sam Stewart Jess Zoe Erik Q. Natalie T. Matt Sam Schlotterer Becca
  5. 5. Groups/ Assigned Taxes Proportional Progressive Regressive Brandon Ben Will Dave Mickey Eric Stefani Megan Amanda Noelle Theresa Jess Proportional Progressive Regressive Blake Greg Bryan Cohen Serg Taylor Kristen Carys Michelle Scott
  7. 7. From Deficit to Debt Chapter 10, Section 4 Source: John Darkow, 2008
  8. 8. From Deficit to Debt Source: O’Farrell, 2008
  9. 9. Deficit Spending Deficit spending occurs when… Government spends more than is collected in revenues Persistent deficits… Contribute to the inflationary spiral (What is inflation?)
  10. 10. Why might deficit spending occur? Scenario 1: Weak economy causes high unemployment  Outcome: Less revenue comes in from taxes Scenario 2: Increased spending on transfer payments  Outcome: Government is providing payment but receiving neither goods nor services in return
  11. 11. Consequences of the National Debt Scenario: Government needs more revenue Action:  ↑ Taxes = ↓ Consumer Purchasing Power Consequence:  The incentive to work is reduced if it means an individual will have to pay more taxes
  12. 12. Crowding-Out Effect Scenario Deficit spending by the government Government Action Sells bonds (borrows $) to finance the deficit Individual Action People will buy government bonds instead of corporate bonds (SAFER) Impact on Investment Spending (“I” Sector of GDP) Corporations are “crowded-out” because government spending forces investment spending to contract.
  13. 13. Exit Ticket NUMBER YOUR PAPER FROM 1 - 5
  14. 14. 1. Some people believe we should have a 15% tax rate on all personal income, regardless of one’s level of total income. What type of tax is this? 2. Which reason best explains why the federal government might reduce taxes? a) Finance defense research b) Slow inflation and create a recession c) Increase consumer spending and stimulate the economy
  15. 15. 3. According to the “ability-to-pay” concept, who should pay higher taxes? 4. Why should we be concerned about a persistent deficit in the national budget? a) Deficits reduce inflation b) Deficits contribute to inflation c) Deficits stimulate the economy 5. Explain the “crowding-out” effect in your own words?
  16. 16. Warm-Up … Web Quest  Work within your groups to complete the web activity.  Everyone needs to complete one.  Time Limit: 3o minutes
  17. 17. Web Quest Groups 1 2 3 4 5 6 7
  18. 18. Web Quest Groups Question 1 Question 2 Question 3 Question 4 Question 5 Question 6
  19. 19. Explain the concepts of aggregate supply and aggregate demand, and how they are used to determine macroeconomic equilibrium Aggregate = TOTAL We are talking about “total” supply and demand economy-wide … not just the supply and demand for 1 product (i.e., Nintendo Wii)
  20. 20. Define Aggregate Supply {AS} Total supply economy-wide Aggregate Supply Curve Shows the quantity of real GDP (RGDP) that would be produced at various price levels. Shifts in the AS Curve changes in the cost of inputs (any cost that would cause firms to offer more or less goods for sale at EVERY price) ↓ cost of inputs ↑cost of inputs leftward shift rightward shift
  21. 21. Define Aggregate Demand {AD} Sum of demand for ALL economic units in the economy Aggregate Demand Curve Shows the quantity of RGDP purchased at each possible price level by 3 main sectors of spending (C, I, G) ↑spending ↓ spending Shifts in the AD Curve rightward shift leftward shift Spending v. Saving (Any situation that would increase or decrease the amount of money consumers, businesses, government have to spend.)
  22. 22. Macroeconomic Equilibrium  Where AD and AS intersect  Both purchasers and producers are happy!  “BIG PICTURE”  measures aggregate (total) spending and production economy-wide~!
  23. 23. When eGDP increases, more jobs are being created and the economy is GROWING When ePL increases, general price levels are going up (INFLATION)
  24. 24. When eGDP decreases, jobs are being lost and the economy is SHRINKING When ePL decreases, general price levels are going down (DEFLATION)
  25. 25. When eGDP increases, jobs are being created and the economy is GROWING When ePL decreases, general price levels are going down (DEFLATION)
  26. 26. Your Turn…  Please complete the graphing activity  Be sure to label ALL parts of the graph!
  27. 27. Create Your Own… Something/Something Please work with a group of 3-4. Create a riddle, poem, or rap that explains aggregate demand/aggregate supply and their relationship with macro-economy equilibrium. You have 15 minutes to prepare. Please be ready to present to the class.
  28. 28. Headliner Activity  Assume the role of a news reporter for the Wall Street Journal (or another business news publication).  Create a HEADLINE for a front-page story that would reflect/apply concepts learned today.  Write a 4-6 sentence “report” about the scenario described, and create an AS/AD curve illustrating the shifts that would occur due to the situation.  Be sure to explain what would happen to productivity, unemployment, and prices in the economy BASED ON THE CHANGES IN eGDP and ePL.
  29. 29. Fighting Inflation and Recession DEMAND AND SUPPLY-SIDE STABILIZATION POLICIES
  30. 30. Demand-Side Policies  Policies designed to ↑ or ↓ AD (shift the AD curve)  Fiscal Policy: the government’s attempt to stabilize the economy through taxing and government spending  Derived from Keynesian economics…
  31. 31. Keynesian Economics  C + I + G + X-IM = GDP  Specifically focused on the idea that a change in “C” or “I” would cause economic instability (↓ GDP)  If there is not enough consumer spending or investment spending, the government can intervene to ↑ AD  ↓ taxes (stimulates “C”)  ↑ government spending This is occurring TODAY in our economy! Recall Obama’s Economic Stimulus Plan
  32. 32. “Expansionary” Fiscal Policy Used to fight unemployment…  ↑ Government Spending (“G”)  ↓ Taxes [indirectly affects “C”] Problem:  ↑ AD will ↑ GDP and ↑ PL …this causes inflation
  33. 33. Expansionary Fiscal Policy
  34. 34. “Contractionary” Fiscal Policy Used to fight inflation…  ↓ Government spending (G)  ↑ Taxes [indirectly affects “C”] Problem:  ↓ AD will ↓ PL (reduce inflation) and ↓ GDP … this causes unemployment
  35. 35. Contractionary Fiscal Policy
  36. 36. Limitation of Fiscal Policy With demand-side fiscal policies, unemployment and inflation cannot be fought at the same time.
  37. 37. Supply-Side Economics “Reaganomics”
  38. 38. Supply-Side Economics “Best of Both Worlds”  ↓ unemployment and ↓ inflation  Policies designed to stimulate output (rGDP) by increasing production (AS curve shifts right)  ↓ Taxes ⇒ ↑ AS  Result, ↑ GDP and ↓ PL
  39. 39. How would supply-side policy work?
  40. 40. The Goal of Supply-Side Tax Cuts
  41. 41. Limitations of Supply-Side Policies  Difficult to predict how Supply-Side policy will affect the economy  Polices would likely restore long-run economic growth, not short-run instability (like today!)
  42. 42. Describe what you see…
  43. 43. Group Think Form 4 groups 1. Each group will receive 1 item 2. Identify 2 functions of the item 3.
  44. 44. What are the functions of money? Why do we need money?
  45. 45. Functions of Money  Medium of exchange: you don’t want money for what it is…you want money because it buys things!  Unit of Account: identifies the cost of something  In the U.S., prices are recorded in dollars and cents  Store of Value: it keeps its purchasing power over time…though PP declines with inflation
  46. 46. Considering the functions of money, why has it been called so many names? Loot Booty Cabbage Dough Bread Moola
  47. 47. Characteristics of Money
  48. 48. What serves effectively as money?  Commodity Money: money that has an alternative use as an economic good / commodity Examples?   Fiat Money: money that has no alternative use as a commodity Examples? 
  49. 49. M1 v. M2 M1 = money as a medium of exchange ● Money you “hold” and can walk into a store and use right away ● Examples? M2 = money as a store of value  M1 + money market deposit accounts, money market mutual funds, and savings accounts
  50. 50. What is Liquidity?  The ease with which an asset can be converted into cash.  What is the most liquid asset?
  51. 51. Fractional Reserve Banking  Banks are required to keep only a “fraction” of their deposits in reserves. 10% reserve requirement today   Example  If you deposit $100 into your checking account, $10 must be put in the vault…but the other $90 is “excess reserves”.  This money is lent out to others who are seeking a loan.
  52. 52. Auto Loan Web Quest: How does monetary policy affect my personal finance? 53
  53. 53. Exit Ticket • Reflect on today’s activity –What did you learn about the impact of monetary policy on the economy? –What did you learn about the impact of monetary policy on you personally? –What did you enjoy most? 54
  54. 54. Warm-Up: Invent “new” Money Turn to the person seated next to you. Together, you will “invent” new money, showing how it fulfills the 3 functions in the same way gold does. Function Gold as Money YOUR item as Money Medium of Exchange Acceptable as a Will it be accepted by users? Medium of Exchange, Does it meet the and gold ore is limited characteristics of money? in supply Unit of Value Measurement is Can it be used to establish determined by size and the value of many things? purity Store of Value Durable – it will not Can it be stored easily? fade or erode Does it retain value?
  55. 55. The Need for Monetary Policy  Too much money in supply can cause inflation
  56. 56. Big Idea Key word to understand:  Interest rate: A rate which is charged or paid for the use of money.
  57. 57. The Federal Reserve America’s Central Bank Responsible for making sure that the nation’s money supply grows at the appropriate rate
  58. 58. Photo Trivia Who is this guy? Why is this building significant?
  59. 59. America’s Central Bank: ‘The Fed’  Established in 1914  Created to lend to other banks in times of need (controls money supply)
  60. 60. Organization of the FED Goal: to provide a safer, more flexible banking and monetary system without interference of political pressures.  Independent agency of the United States government  7 member Board of Directors in Washington D.C.  12 Districts Banks
  61. 61. Map: 12 District Banks
  62. 62. Main Responsibility of the Fed Controlling money supply! Among others…
  63. 63. Implementing Monetary Policy Monetary Policy:  Expansion or contraction of the money supply to influence the cost and availability of credit (loans).  The Fed uses four [4] major tools of MP to affect the amount of excess reserves in the system  This impacts Rates: the cost of credit Interest Money Supply: the availability of credit
  64. 64. Two Types of Monetary Policy ‘Loose’ Monetary Policy  Used to stimulate the economy  Action: ↑ MS and ↓ IR ↑ eGDP and ↓ unemployment  Goal: Bottom Line, Low interest rates encourage borrowing by consumers and businesses
  65. 65. Two Types of Monetary Policy ‘Tight’ Monetary Policy  Used to slow the economy  Action: ↓ MS and ↑ IR Bottom Line,  High interest rates slow economic growth because consumers and businesses borrow less
  66. 66. 4 Tools of Monetary Policy  Federal Funds Rate  Discount Rate  Reserve Requirement  Open Market Operations
  67. 67. Fed Funds Rate (FFR)  Interest rate banks charge when they borrow from each other FFR is set by the Fed   ↓ FFR  Banks will be more likely to take loans from other banks  Money from loan transactions goes into E.R.  Result, ↑ ER = ↑ Loans = ↑ MS = ↓ I.R.
  68. 68. Fed Funds Rate  ↑ FFR  Banks are likely to pay loans back to other banks  Money used to pay back loans comes from E.R.  Result, ↓ ER = ↓ Loans = ↓ MS = ↑ I.R.
  69. 69. FFR and the Prime Rate Prime Rate is the basis for many loans including home equity loans, auto loans and credit cards  The rates on these types of loans will change when the Fed changes the FFR ↓ FFR = ↓ Prime Rate ● Result, Consumers will borrow more
  70. 70. Summary ~ Tools of MP Tool of MP Δ in MS Δ in IR Open Market Operations ↑ MS ↓I.R. Buying Bonds ↓ MS ↑ I.R. Selling Bonds Discount Rate ↑ the D.R. ↓ MS ↑ D.R. ↓ the D.R. ↑ MS ↓ D.R. Reserve Requirements ↑ the R.R. ↓ MS ↑ R.R. ↓ the R.R. ↑ MS ↓ R.R. Federal Funds Rate ↑ the F.F.R. ↓ MS ↑ I.R. ↓ the F.F.R. ↑ MS ↓I.R.
  71. 71. Summary ~ Tools of MP Tool of MP Δ in MS Δ in IR Open Market Operations Buying Bonds Selling Bonds Discount Rate ↑ the D.R. ↓ the D.R. Reserve Requirements ↑ the R.R. ↓ the R.R. Federal Funds Rate ↑ the F.F.R. ↓ the F.F.R.
  72. 72. Monetarism  A doctrine of economic thought which places primary importance on the role of money and its growth  Monetarists believe that fluctuations in MS can lead to inflation and unemployment  View: The problem of inflation and unemployment would be helped by steady growth in money supply
  75. 75. Video Analysis - The FED  As you watch the video, record the three primary responsibilities of the FED that help maintain a strong economy.  Briefly explain what each responsibility entails  Jot down ways you will remember how the tools of MP affect money supply and interest rates in the economy, based on this video
  76. 76. How much money would you have if you had one of each of these bills and coins? Lincoln Bill _________ Lincoln Coin _________ Jefferson Coin _________ Franklin Bill _________ Washington Bill _________ Kennedy Coin _________ Washington Coin _________ Grant Bill _________ Hamilton Bill _________ Roosevelt Coin _________ TOTAL _________
  77. 77. In an increasing globalized world and integrated economy, it is essential that you have an understanding of the U.S. currency and money system in relation to other counties. As a result of Globalization, you must understand the significance of foreign exchange and currencies, and how the value of the U.S. dollar compares to other countries and has changed over time!
  78. 78. The Unveiling of the new five dollar http://www.moneyfactory.gov/newmoney/flash/5Currency/unveil5new.html Interactive five dollar bill http://www.moneyfactory.gov/newmoney/main.cfm/currency/interactiveNot es New security features of the five dollar bill http://www.moneyfactory.gov/newmoney/main.cfm/currency/new5 Counterfeiting of money http://www.secretservice.gov/money_detect.shtml
  80. 80. 1. Your Thoughts… • Did you like this activity? • Did you learn anything new? • Anything interesting? • Is there anything you want to learn more about? We are living in an increasingly globalized economy…you need to stay informed! Economic changes around the world impact you…
  81. 81. Tools of Monetary Policy Money Supply Interest Rates Admit Open Market Operations Ticket - The Fed buys bonds - The Fed sells bonds Discount Rate - ↑ the D.R. - ↓ the D.R. Reserve Requirements - ↑ the R.R. - ↓ the R.R. Fed Funds Rate - ↑ the F.F.R. - ↓ the F.F.R. 1. When we want to stimulate the economy, which type of monetary policy would be implemented? 2. What would this type of monetary policy do to money supply and interest rates? 3. What is the result of this change in interest rates on the borrowing habits of consumers and businesses? Why? 86
  82. 82. Monetary Policy Jubilee Your assignment is to work with your  group members to create a poster that captures the key features of the FED’s tools of monetary policy. This will allow you to look more deeply into how changes in the tools of monetary policy impact money supply and interest rates, and ultimately the demand for credit (loans) by people like you! 
  83. 83. Your Poster Must… Include illustrations and text that creatively highlight each of  the four [4] tools of monetary policy, and how increases/decreases in the tools would affect money supply and interest rates in the economy – 8 points (2 points / tool) Include ILLUSTRATIONS of how changes in interest rates  affect the amount of loans people want (HINT – what happens to the cost of borrowing when interest rates change) – 4 points Include a Portrayal of the beliefs of Monetarists in a way that  you will remember for the quiz and final exam – 2 points Be in color – 2 points  
  84. 84. You Must… Work collaboratively with your group – 3 points  Use your time wisely; finishing within the time  limit – 3 points Be creative – 3 points  Points will be deducted if you simply re-write your  notes on the poster board.  This assignment is asking you to synthesize what you have learned and review it in a meaningful way that will ultimately ensure success on the course assessment.