Monetary (Federal Reserve) vs. Fiscal (Gov't Actions)
Monetary Policy
•Refers to the regulation of the money supply, controlling inflation, & adjusting interest rates •Controlled by the “Fed” or Federal Reserve Board To increase money supply the FED may:
To decrease the money supply the FED may:
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Fiscal Policy
•Refers to the taxing, spending, & borrowing activities of the national government •Conducted by the President & Congress •President proposes the budget & Congress passes it Spending Inc in Gov't Spending May increase demand (& may increase taxes) Dec in Gov't Spending may decrease demand (& may decrease taxes) Taxation: Inc. taxes, reduces $ for people/business spending Dec. taxes increased $ for people/business spending |
Fiscal Policy - Revenue (taxes)
Individual income taxes
•The individual income tax is the federal gov’ts largest source of revenue Payroll taxes •Tax that an employer withholds from an employee's salary & pays on behalf of his employees •Pay for social insurance (Social Security & Medicare) Corporate income taxes •Tax on corporate profits Excise taxes •Taxes on the liquor, tobacco, gas, telephones, air travel, & other luxury items Other •Estate & gift taxes •Tariffs - taxes on imports Borrowing •Budget deficit - borrow money •Selling Treasury notes & savings bonds •Adds to national debt |
What are the largest contributors of revenue?
Why are excise taxes also called sin taxes? Which taxes should the government increase? What taxes should the government decrease? |
Fiscal Policy - Spending
There are 2 Major Types of Spending:
Entitlements: provided to people who meet the requirements, automatically renewed, , some with a COLA (cost of living adjustment), examples include Medicaid & Medicare, very difficult to change or reduce due to popularity (esp with the elderly), make up the biggest part of budget
Discretionary Spending: set by the government, not automatic, defense is always the largest discretionary expenditure
Entitlements: provided to people who meet the requirements, automatically renewed, , some with a COLA (cost of living adjustment), examples include Medicaid & Medicare, very difficult to change or reduce due to popularity (esp with the elderly), make up the biggest part of budget
Discretionary Spending: set by the government, not automatic, defense is always the largest discretionary expenditure
Budgets
Executive Branch
•Agencies estimate budget needs & send to the Office of Management & Budget (OMB = charged with overseeing the budget process for the president). •Amount typically based upon the $ granted in the previous year. •OMB reviews requests & makes recommendations to the President. •President reviews OMB recommendations & then submits budget to Congress. Presidential action •President signs or vetoes entire taxing & spending bills – no line item veto •Congress can override a veto with 2/3 vote in both houses |
Congress (Constitution grants “power of the purse”)
• Congressional Budget Office (CBO) provides an independent analysis of the President's budget -- a check on OMB •Roles of Budget, Ways and Means, Finance, & Appropriations Committees •Input & lobbying from agencies •Majority vote needed in both houses •Government Accountability Office (GAO) is a congressional watchdog agency that ensures money is spent as prescribed by law |