The document discusses government spending, revenue, and fiscal and monetary policy in the United States. It notes that the government spends around $3 trillion annually, primarily on direct benefits, defense, discretionary programs, and debt interest. Taxes are the main source of revenue, especially individual income tax. The government also borrows money by selling bonds, notes, and bills, contributing to the national debt. Fiscal policy uses spending and taxation, while monetary policy involves controlling the money supply through tools used by the Federal Reserve System.

1. The President and the Economy

2. 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

3. – 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

4. Figure 1

5. Figure 3

6. Taxes as a Source of Revenue
• Taxes are 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.

7. 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.

8. 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.

9. Fiscal and Monetary Policy
• The government can influence the
economy in two main ways:
– Fiscal policy involves using
government spending and taxation to
influence the economy.
– Monetary policy involves controlling the
supply of money and credit to influence
the economy.

10. 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

11. Figure 4

12. 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.

13. 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

14. Figure 5

15. The Federal Reserve System (cont.)
• The Fed uses four main tools to control the
financial activities of the nation’s banks:
– The discount rate is the rate the Fed
charges member banks for loans.
– The Fed can raise or lower the reserve
requirement—the money banks must
keep in their vaults or on deposit with
the Federal Reserve Banks.

16. 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.