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
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
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
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.
