Government Spending• The government currently spends roughly $3 trillion per year, a figure that can be broken down into four major components: – direct benefit payments to individuals, including Social Security, health, and welfare programs; – national defense; Comparing Governments: Government Revenue and Expenditures
– discretionary spending including spending on the environment, transportation, criminal justice, and other areas; and– interest on the national debt. Comparing Governments: Government Revenue and Expenditures
Taxes as a Source of Revenue• Taxesare payments made by individuals and businesses to support government activities.• The individual income tax is the federal government’s biggest single source of revenue.• The federal income tax is levied on a person’s taxable income,an individual’s total income minus certain deductions and exemptions.
Taxes as a Source of Revenue (cont.)• Excise taxes are taxes on the manufacture, transportation, sale, or consumption of goods and the performance of services.• Taxes levied on imported goods are called customs duties, tariffs, or import duties.• An estate tax is a tax on property and money left after someone has died.
Borrowing for Revenue• In addition to collecting taxes, the federal government borrows money.• The government borrows by selling federal securities—financial instruments that include bonds, notes, and treasury bills.• Government borrowing to fund annual budget deficits over time creates the national debt.• The size of the national debt affects the federal budget and the economy.
Fiscal and Monetary Policy• The government can influence the economy in two main ways: – Fiscal policyinvolves using government spending and taxation to influence the economy. – Monetary policyinvolves controlling the supply of money and credit to influence the economy.
Fiscal and Monetary Policy (cont.)• When the government increases spending or reduces taxes, it is likely to run a deficit because it must spend money that it does not have.• Since the 1930s, the United States has had deficit, or unbalanced, federal budgets. The Public Debt, 1940-2008
The Federal Reserve System• The Federal Reserve System, known as the Fed, is the central banking system of the United States.• When banks need money, they borrow from the Fed.
The Federal Reserve System (cont.)• The United States is divided into 12 Federal Reserve Districts.• Each district has one main Federal Reserve Bank.• Most Federal Reserve Banks have branch banks within their districts. Federal Reserve Districts
The Federal Reserve System (cont.)• The Fed uses four main tools to control the financial activities of the nation’s banks: – The discount rateis the rate the Fed charges member banks for loans. – The Fed can raise or lower the reserverequirement—the money banks must keep in their vaults or on deposit with the Federal Reserve Banks.
The Federal Reserve System (cont.) – The Fed can put money into the economy by buying government bonds on the open market—open-market operations. – The Fed may sell government securities.