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Unit 6

Unit 6. Role of Government in a Market Economy. Circular Flow of a Mixed Economy. ECONOMIC GOALS of Federal Government. LOW inflation LOW unemployment/ HIGH employment SLOW, GROWING GDP C + I + G + (exports - imports) = GDP. Stabilize the economy. 2. Low unemployment.

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Unit 6

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  1. Unit 6 Role of Government in a Market Economy

  2. Circular Flow of a Mixed Economy

  3. ECONOMIC GOALS of Federal Government • LOW inflation • LOW unemployment/ HIGH employment • SLOW, GROWING GDP C + I + G + (exports - imports) = GDP

  4. Stabilize the economy 2. Low unemployment 1. Low inflation 3. Slow, growing GDP

  5. Business cycle Should the Federal Government attempt to even out the business cycle?

  6. Fiscal Policy Ability of federal government to stabilize the economy

  7. Why has the government grown? • Population growth • Rising expectations • Inflation • Increased military spending • Promoting economic stability

  8. “Taxes are what we pay for civilized society”

  9. Why do people dislike paying taxes? • Government can coerce people. • Markets are based on voluntary actions. • Costs are obvious; benefits are not. • Reduce the link between payment & consumption. QUESTION: What is the “perfect” tax? ANSWER: The one you pay & I don’t 

  10. What is a “good tax” • The tax is “fair”. • The tax is clearly imposed. • The tax is certain. • The tax is simple. • The tax is efficient; doesn’t cost more to collect than money it raises.

  11. Benefits-received principle People pay taxes based on government services received. Gas tax  roads Hunting license  DNR Ability-to-pay principle People should pay taxes according to how well that person can shoulder the burden. Income tax Estate tax Two principles of taxation

  12. Regressive taxes “poor pay more” • Poor pay higher % of income in taxes • same $ amount paid = different % of income • $1000 $8,000 $80,000 • $800 $800 $800

  13. “the more you make, the more they take” Progressive taxes • Rich pay higher % of income in taxes • $1000 $8,000 $80,000 • 1% 10% 80% • $ $ $

  14. same % of income; Different $ amts. Proportional taxes • All income pay same % of income in taxes • $1000 $8,000 $80,000 • 10% 10% 10% • $ $ $

  15. What is a fair tax?

  16. Taxes • Government collects taxes as a form of revenue to pay for expenditures. • Government uses taxes to encourage behavior (subsidies & tax credits) and discourage behavior (sin taxes). • Excise tax ~ specific product tax (gas) • FICA tax ~ Federal Insurance Contributions Act; payroll tax = 7.65% • 6.2% funds Social Security (capped at $106,800) • 1.45% funds Medicare

  17. Public goods

  18. “Fear the Boom and Bust” • Watch rap • How should the economy be “steered” according to Keynes? • Hayek wants to “set markets free” from what? • Explain the implications these opposing economic viewpoints have for policymakers? Video is posted at nreconomics.wikispaces.com under Unit 6

  19. Credit Crisis Visualized • Define leverage. • Define CDO.(collaterized debt obligation) • Explain credit default swaps. • What role did the rating system play in the crisis? • Define subprime mortgage. • How did CDOs become riskier? • Define “underwater”. Video is posted at nreconomics.wikispaces.com under Unit 7 parts 1 & 2

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