Economics Ch. 9-13
benefit principle of taxation
belief that taxes should be paid according to benefits received regardless of income
ability-to-pay principle
belief that taxes should be paid according to level of income, regardless of benefits received
Gasoline taxes are a good example of the ___________ principle of taxation.
benefit
current yield
bond's annual coupon interest rate divided by purchase price; measure of a bond's return
municipal bonds
bonds issued by the state & local governments
Social Security is an example of a ___________________. A. pork expenditure B. private sector expenditure C. subsidy D. transfer payment
D. transfer payment
Describe the relationship of the federal deficit to the national debt.
The federal deficit leads to borrowing, which adds to the national debt.
business cycles
regular increases and decreases in real GDP
pension
regular payment intended to provide income security to someone who has worked a certain number of years or reached a certain age
cyclical unemployment
related to swings in the business cycles
market basket
representative selection of goods and services used to compile a price index
pay-as-you-go provision
requirement that new spending proposals or tax cuts must be offset by reductions elsewhere
cost-push inflation
rising input costs drive up prices of products
consumer price index
series used to measure price changes for a representative sample of frequently used consumer items
treasury bill
short-term U.S. gov't obligation w/a maturity of one year or less in denominations of $100
beneficiary
someone who inherits the ownership of a financial asset if the purchaser dies
trust fund
special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways
depression
state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
coupon rate
stated interest on a corporate, municipal, or government bond
leading economic indicator
statistical series that turns down before the economy turns down, or up before the economy turns up
price index
statistical series used to measure changes in price level over time
composite index of leading economic indicators
statistical series used to predict turning points in the business cycle
equities
stocks that represent ownership shares in corporations
portfolio diversification
strategy of holding different investments to protect against risk
401(k) plan
tax deferred investment and savings plan that acts as a personal pension fund for employees
example of sin tax
tax on liquor or tobacco
marginal tax rate
tax rate that applies to the next dollar of taxable income
public sector
that part of the economy made up of local, state, and federal gov'ts
private sector
that part of the economy made up of private individuals and businesses
What can happen to factors of production when prices go up as an end result of taxation?
the cost of production goes up which causes prices to rise and causes people to buy less which then causes companies to cut back on the factors of production (land, capital, labor, etc.)
savings
the dollars that become available when people abstain from consumption
net asset value
the market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued
What factors affect the accuracy of the deficit projection?
the state of the economy, the changes in the economy, and the way expenditures are reported
national debt
total amount borrowed from investors to finance the government's deficit spending
average tax rate
total taxes paid divided by the total taxable income
grant-in-aid
transfer payment from one level of the gov't to another that doesn't involve compensation
misery/discomfort index
unofficial statistic that is the sum of the monthly inflation and unemployment rates
distribution of income
way in which the nation's income is divided among families, individuals, or other designated groups
What makes taxes tolerable to many people?
when the tax laws are simple and easy to understand
frictional unemployment
workers that are in between jobs
base year
year serving as a point of comparison for other years in the price index
recession
decline in real GDP lasting at least two quarters
deflation
decrease in the general level of prices for goods and services
risk
degree to which the outcome is uncertain but a probable outcome can be estimated
What situation must exist to make it easier to shift the incidence of a tax to the consumer?
demand must be inelastic
According to the excessive monetary growth theory of inflation, any extra money in the economy is spent, leading to a _________ ___________ effect.
demand-pull
GDP gap
difference b/t what economy can and does produce
how to calculate rate of inflation?
divide CPI by the beginning value of CPI
How is the dollar cost of a market basket converted to an index value?
dividing the cost of every market basket by the base-year market basket cost
certificate of deposit
document showing that an investor has made an interest-bearing loan to a financial institution
wage-price spiral
doesn't blame any group for rising prices
maturity
life of a bond or length of time funds are borrowed
spending cap
limits on annual discretionary spending
IRAs
long-term, tax sheltered time deposits that can be set up as a part of an individual retirement plan
savings bond
low denomination, non-transferable bond issued by the federal gov't
creeping inflation
low rate of inflation at 1-3% annually
spot market
market in which a transaction is made immediately at the prevailing price
secondary market
market in which financial assets can be sold to someone other than the original issuer
capital market
market in which financial capital is loaned and/or borrowed for *more than one year*
money market
market in which financial capital is loaned and/or borrowed for *one year or less*
primary market
market in which only the original issuer can sell/repurchase a financial asset
econometric model
mathematical expression used to describe how the economy is expected to perform in the future
Dow Jones Industrial Average
measure of stock market performance based on 30 representative stocks
Standard & Poor's 500
measure of stock market performance based on 500 stocks traded on several markets
What kind of bonds are generally tax-exempt?
municipal bonds
financial system
network of savers, investors, and financial institutions that work together to transfer savings to investors
nonbank financial institution
non-depository institution that channels savings to investors
tax-exempt
not subject to tax by federal or state gov'ts
unemployment rate
number of unemployed persons divided by civilian force; percentage of people unemployed
What was the 1990 Budget Enforcement Act's main feature?
pay-as-you-go provision
transfer payment
payment for which the gov't receives neither goods nor services in return
labor force
people 16 or older either working or looking for a job
per capita
per person basis; total divided by population
progressive tax
percentage of income paid in tax *rises* as the level of income rises (people with higher income pay more tax than lower income people)
regressive tax
percentage of income paid in tax goes *down* as income rises (people with lower incomes pay more taxes than people with higher incomes)
proportional tax
percentage of income paid in tax is the *same* regardless of the level of income
bear market
period during which stock market prices move *down* for several months or years in a row
bull market
period during which stock market prices move *up* for several months or years in a row
stagflation
period of slow economic growth coupled w/inflation
expansion
period of uninterrupted growth of real GDP
debtor
person who borrows and owes money
stockbroker
person who buys or sells securities for investors
creditor
person/institution to whom money is owed
securities/stock exchange
place where buyers & sellers meet to exchange stocks
trough
point in the business cycle when real GDP stops declining
peak
point in the business cycle when real GDP stops expanding
line-item veto
power to cancel specific budget items without rejecting the entire budget
premium
price paid at regular intervals for an insurance policy
demand-pull inflation
prices rice b/c all sectors of the economy try to buy more good and services than the economy can produce
par value
principle of a bond or total amount borrowed
entitlements
program/benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals
What are the two broad categories of gov't spending?
public and private
What directly and indirectly affects how resources are allocated?
Public sector spending
What sector(s) of the economy provide(s) the most savings?
households and businesses
What criteria is generally recognized as making taxes fairer?
if taxes have fewer exceptions, deductions, and exemptions, then taxes are viewed as being fairer
inflation
increase in the general level of prices of goods and services
implicit GDP price deflator
index used to measure price changes in GDP
producer price index
index used to measure prices received by domestic producers
hyperinflation
inflation in excess of 500% per year
financial intermediary
institution that channels savings to investors
The financial institutions that bring together funds that savers provide and then lend those funds to others are called financial __________________.
intermediaries
business fluctuations
irregular increases and decreases in real GDP
What effect might taxes have on productivity and economic activity?
it changes the incentives to save, invest, and work
What are the 3 criterion for effective taxes?
1. Equity 2. Simplicity 3. Efficiency
What are the two main causes for the growth in gov't spending since the 1930s?
1. a major change in public opinion gave the gov't a larger role in everyday economic affairs (FDR's New Deal) 2. massive gov't spending funded the U.S. involvement in WW2
examples of financial intermediaries
1. banks 2. credit unions 3. life insurance companies 4. pension funds 5. savings & loan associations 6. mutual savings banks 7. mutual funds 8. savings banks 9. finance
3 main components of a bond
1. coupon rate 2. maturity 3. par value
examples of nonbank financial institution
1. finance companies 2. insurance companies 3. pension funds
3 general types of taxes in the U.S.
1. proportional tax 2. progressive tax 3. regressive tax
What are the two criteria for making a tax efficient?
1. tax should be easy to administer 2. tax should generate enough worthwhile revenue that doesn't harm the economy
What two factors is the ability-to-pay principle based on?
1. the benefits received from the gov't can't always be measured 2. people with higher income suffer less discomfort than people with lower income
2 types of gov't spending
1. the gov't pays to hire workers, maintain utilities, and give supplies. (tanks, office buildings, etc.) 2. transfer payments such as Social security, welfare, unemployment compensation, and aid for people with disabilities
Which of the following normally decreases the federal deficit? A. an increase in taxes B. an increase in spending C. entitlement programs D. low economic activity
A. an increase in taxes
Since 1983, spending by all levels of gov't as a percentage of GDP has ________________. A. remained fairly constant B. has decreased slightly C. has increased dramatically D. has increased
A. remained fairly constant
Which of the following is an example of entitlement payment? A. federal money given to a contractor in exchange for military uniforms B. federal money given to a senior citizen as a Social Security payment C. federal money spent to pay interest on the national debt D. federal money spent to build a new public highway
B. federal money given to a senior citizen as a Social Security payment
Why do most economists tend to disregard trust fund balances?
Because trust fund balances represent money the gov't owes to itself
In what way is the national debt different from private debt? A. Most of the national debt is owed to others. B. Private debt doesn't have to be repaid by a specific date. C. The national debt doesn't have to be repaid by a specific date. D. The gov't gives up purchasing power when it repays the national debt.
C. The national debt doesn't have to be repaid by a specific date.
Capital formation depends on _______________________. A. saving alone B. borrowing alone C. both saving & borrowing D. neither saving nor borrowing
C. both saving & borrowing
the most popular and widely measure of stock market performance?
Dow Jones Industrial Average
What is the only way the annual budget can lower the federal debt?
If the federal budget runs a surplus, then the debt goes down.
What happens to the purchasing powers of individuals as a consequence of national debt?
It causes a transfer of purchasing power from the private sector to the public sector
oldest, largest, and most prestigious organized stock exchange in the U.S.?
New York Stock Exchange
Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is ___________________.
Progressive
T/F Reduced purchasing power is a consequence of inflation.
True
treasury bond
U.S. gov't bond with a maturity of 30 yrs.
treasury note
U.S. gov't obligation with a maturity of 2 to 10 years
pork
a line-item budget expenditure that circumvents normal budget procedures and benefits a small number of people or business
sin tax
a relatively high tax designed to raise revenue while reducing consumption of a socially undesirable product
saving
absence of spending that frees resources for use in other activities or investments
futures contract
an agreement to buy/sell at a specific date in the future at a predetermined price
balanced budget
annual budget in which expenditures equal revenues
deficit spending
annual gov't spending in excess of taxes and other revenues
tax return
annual report by a taxpayer filed with the local, state, or federal gov't detailing income earned and taxes owed
efficient market hypothesis
argument that stocks are always priced about right because they are closely watched
structural unemployment
caused by change in economy that reduced demand for workers
seasonal unemployment
caused by changes in weather or other conditions that reduce demand for jobs
technological unemployment
caused by technological advances that makes workers' skills obsolete
financial assets
claims on the property and the income of the borrower
mutual fund
company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies
bond
contract to repay borrowed money and interest on the borrowed money at regular future intervals
depression scrip
currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s
over-the-counter market
electronic marketplace for securities that aren't traded on an organized change
What is the connection between entitlements and mandatory spending in the federal budget?
entitlements are classified as mandatory spending in the federal budget
tax loophole
exception/oversight in the tax law allowing a taxpayer to avoid paying certain taxes
junk bonds
exceptionally risky bonds
Medicare
federal health-care program for senior citizens
individual income tax
federal tax levied on the wages, salaries, and other income of individuals
incidence of a tax
final burden of a tax
finance company
firm that makes loans directly to consumers and specializes in buying installment contracts from merchants who sell on credit
pension fund
fund that collects & invests income until payments are made to eligible recipients
call option
futures contract giving a buyer the right to cancel a contract to *buy* something
put option
futures contract giving a buyer the right to cancel a contract to *sell* something
option
futures contract giving a buyer the right to cancel the ocntract
sales tax
general tax levied on most consumer purchases
subsidy
gov't payment to encourage or protect a certain economic activity
trend line
growth path the economy would follow if it were not interrupted alternating periods of recession and recovery
High return, _________ risk.
high
crowding-out effect
higher-than-normal interest rates caused by heavy gov't borrowing
outsourcing
hiring outside firms to perform non-core operation to lower operating costs
