Economics 16-25

Earmark (v)

an identifying mark; in congressional legislation, designating the use of federal funding for a specific purpose

commercial bank (v)

an institution with either a national or state charter that offers a wide range of services to depositors and borrowers

medium of exchange (v)

an intermediary used in the buying process to avoid simple "good for good" bartering

Stock (v)

an ownership share in a corporation that entitles the owner to a portion of the corporation's profits

Budget Deficit (v)

government spending in which the expenditures (what is spent) are more than revenue (what is earned or brought in)

Mandatory Spending (v)

government spending required by law; it cannot be cut

Mandatory spending (v)

government spending required by law; it cannot be cut

All of this saving and lending makes economic growth possible. The economy has four sectors:

household, business, government, and foreign

index (v)

in economics and finance, a statistical measure of changes in the values of securities

aggregate demand (v)

in macroeconomics, an economy's total demand for goods and services in a given time period; also called domestic final demand

Corporate income tax (V)

a tax imposed by the government on the profits of US resident businesses

Flat Tax (V)

a tax in which a single rate is applied to all taxpayers regardless of their income

What is a proportional tax?

a tax in which the percentage a person pays in taxes stays the same regardless of income

What is a regressive tax?

a tax in which the percentage individuals pay decreases as their income increases

What is a progressive income tax?

a tax in which the tax rate increases as a person's income increases

Sin tax (V)

a tax meant to discourage consumption of goods or services considered harmful such as cigarettes or alcohol

Customs duty (V)

a tax on any goods exported or imported from one country to another

Capital gains Tax (v)

a tax on the profits an investor receives when selling an asset for more than the purchase price

Estate tax (v)

a tax placed on any assets passed to a deceased person's heirs (excluding their spouse)

Payroll tax (V)

a tax that employers withhold from employee paychecks and pay to the IRS on their behalf

Expenditure (v)

act of using up or consuming

Federal Reserve Act (v) of 1913

act that created the Federal Reserve Board and the regional Federal Reserve Banks

Surplus (v)

amount or quality greater than what is needed

Savings Account (z)

an account at a bank or credit union

Investment tax credit (V)

an amount of money a business is allowed to deduct from its taxes based on the amount it invested in itself

deregulation (v)

an attempt to create competition in an industry by reducing government controls and influence

pension fund

fund that brings in money from employees' salaries to save and invest for retirement

Now, consider what happens if John has a budget surplus. A surplus happens when income exceeds expenses. If John's income is $10,000, but he spends $8,000, he has a surplus of $2,000. He also has choices. He can save that money for a large purchase or for emergencies. A few years of a budget surplus would look like the next table.

(Chart (Graph L18 A1))

People sometimes misunderstand the difference between deficit and debt. Let's go back to John for a second. If he borrows money to pay for that $4,000 deficit, he has taken on $4,000 in debt. What would happen if John continued his deficit spending, borrowed money to pay for it, and didn't pay back his debts? Look at this table to find out.

(Chart (Graph L18 A1))

It is important to remember that an increase in government spending can be a cause for deficits, but that is not the only cause. Deficits can also be caused by a tax cut or a decrease in revenue generated when fewer people pay taxes. The table that follows shows some scenarios in which a budget deficit could occur.

(Chart (Graph L18 A4))

The table describes what each of those characteristics means and why all of them are important.

(Chart (Graph L19 A1))

The people who are employed to either work at or build the restaurant will have money to buy goods and services in the community. Perhaps they will also save some of that money and deposit it at a financial intermediary. The intermediary will then loan part of that money to someone else, and the cycle of economic growth will continue

(Chart (Graph L20 A1)) Surplus funds Financial assets, dividends, interest

What types of banking transactions can be performed through a mobile app? (Select all that apply.)

- receive automatic payments from an employer - set up automatic bill pay - transfer money between saving and checking accounts

Appropriation (v)

funds set aside by official action for a specific use

Intergovernmental expenditures (v)

funds that one level of government transfers to another level for spending

return (v)

gain or loss from an investment

What type of government expenditure is defense spending?

goods and services

deficit spending (v)

government spending by borrowing funds rather than raising funds from taxation

Accelerated Depreciation (v)

a schedule of depreciation that allows for greater tax deductions in the earlier years of an asset's life

Anisia decides she doesn't like either of the investment options, and she hears about something called compounded interest. This means that her money receives a return on the initial investment and on any return. It looks something like this:

(Chart (Graph L20 A3))

There are many types of investments. A few of the most common are shown below.

(Chart (Graph L20 A3))

When people begin investing, it is helpful to start with a set of goals. When setting financial goals, there are short-term, medium-term, and long-term goals. To determine goals and how to invest money, these are some important questions to ask:

(Chart (Graph L20 A3))

You can see in the chart that the investment paid 10 percent on the $100, but the next year, it paid interest on the initial investment plus the $10 return on that investment. While this return is not very dramatic, it shows the benefit of starting an investment early and leaving it for a long period of time. There is actually a set of guidelines called the Rule of 72 that helps people guess what will happen with an investment over time. If Anisia's $100 was invested in 2015 and cashed out her investment in about 40 years, this is what it could be:

(Chart (Graph L20 A3))

It would look like the following:

(Chart (Graph L20 A4))

Which social welfare government acts and programs were enacted as a result of the Great Depression? (Select all that apply.)

- Emergency Banking Act - Federal Deposit Insurance Corporation (FDIC)

In the United States, the Great Depression brought about the first major government-run social welfare system.

- Emergency Banking Act (1933) - Federal Deposit Insurance Corporation, or FDIC (1933) - Social Security Act (1935)

Other Major Welfare Acts

- Food Stamp Act (1964) - Economic Opportunity Act (1964) - basis for Johnson's Great Society program - Social Security Amendments (1965) - created Medicaid and Medicare - Elementary and Secondary Education Act (1965) - reauthorized with No Child Left Behind (2001)

Obamacare

- Patient Protection and Affordable Care Act (2010) - most extensive overhaul of Medicaid and Medicare since 1965 - expanded access to private and public health insurance for citizens - upheld by Supreme Court (2012) - continues to be a point of contention politically and socially

What are examples of federal mandatory spending? (Select all that apply.)

- Social Security - Medicare

Which are examples of expenditures that qualify as transfer payments? (Select all that apply.)

- Social Security checks - grants-in-aid

As of November 2016, the federal debt has grown to nearly $19.8 trillion dollars, and there is only one reason for the debt: deficit spending. The conversation gets much more complicated and controversial when looking at the reasons for the deficit spending year after year. Here are some examples:

- Tax cuts made in the early 2000s were not paired with a decrease in spending, which led to increased deficit spending. - The wars in Iraq and Afghanistan beginning in the early 2000s have been expensive, leading to more deficit spending. - The recession that started in 2007—the worst economic downturn in the United States since the Great Depression—along with federal spending to stimulate the economy, plus a decrease in tax revenue, led to deficit spending and an increase in the federal debt.

What were results of the Savings and Loan Crisis? (Select all that apply.)

- The Federal Deposit Insurance Corporation (FDIC) replaced the Federal Savings and Loan Insurance Corporations (FSLIC) - People moved their deposits from savings and loan institutions to banks - The final cost to taxpayers who had to cover the deposit insurance was more that $100 billion

Read the scenario. For three years in a row, the federal government's expenditures exceeded its revenue. As a result, the federal debt grew by $4 billion, and the interest payment on the federal debt increased substantially. Which are true about the scenario? (Select all that apply.)

- The federal government's increase in debt led to an increase in interest payments - The federal government's deficit spending led to an increase in the federal debt

What are examples of discretionary government spending? (Select all that apply.)

- The government allocates discretionary spending for national parks - The government allocates discretionary spending for national defense - The government allocates discretionary spending for space programs

What are the primary opposing viewpoints concerning social welfare? (Select all that apply.)

- The government or society should provide social welfare - Individuals and private groups should assist those in need; there is no place for the government

How does the national debt impact private investors? (Select all that apply.)

- The national debt requires the government to increase revenue streams and potentially increase taxes - The national debt cause a crowding-out effect and increases interest rates for private borrowews

War on Poverty

- legislation introduced by President Lyndon B. Johnson during the 1964 State of the Union Address - seen as a continuation of President Franklin Delano Roosevelt's New Deal programs - part of Johnson's Great Society program that created these federal programs: - Job Corps - Head Start

Before examining investment types and the reasons why people invest, it is helpful to consider how investments work. Consider the case of Anisia, who has $100 to invest. She sees that she has a few options. They are

- loan $100 to a person on a crowdfunding site that promises to pay Anisia the money back plus $15 in one month (15 percent return in one month); or - put the money in a savings account where it will receive 3 percent interest in 12 months (3 percent return in one year).

What are examples of discretionary federal spending that can face budget cuts? (Select all that apply.)

- military - education

Personal Responsibility and Work Opportunity Act

- signed into law by President William J. Clinton in 1996 - Clinton: "End welfare as we know it." - focus was on putting Americans back to work through assistance and education - one popular aspect was Temporary Assistance for Needy Families (TANF)

Social Welfare in America

- social and political effort to assist individuals in need with material well-being - primary areas of assistance: - food - housing - medical care

In addition to the Fed, many different banking institutions exist in the United States, including commercial banks, savings and loans, and credit unions. These institutions all have some things in common, including accepting deposits, offering interest on deposits, and making loans. However, they also have some characteristics that differentiate them from each other.

A commercial bank is one that has either a national or state charter. Commercial banks tend to be larger institutions that offer a wide variety of services. These services include savings and checking accounts, investment accounts and services, secured loans, and unsecured loans. A large commercial bank may offers loans to individuals, businesses, and corporations.

So, if each member of a community deposits money at an S&L, that institution will loan the funds to build homes. In return, the individuals will pay back those loans and others will have an opportunity to borrow. Over time, the activities of these institutions expanded, but not to the same degree as large commercial banks; their focus remains on real estate financing.

A credit union is another common type of financial institution that operates to serve its members. They are nonprofit entities run by a board of directors that is chosen by the members. Credit unions can serve many different types of groups, like members of the military or people from a particular geographic area.

When people spend more money than they make, they are deficit spending. If John makes $6,000 but spends $10,000, he has engaged in deficit spending. The deficit itself is the difference between what he made and what he spent. In this case, the deficit is $4,000.

A deficit really is that simple, even though understanding the federal budget deficit can sometimes seem complicated. The federal budget deficit is the excess of federal expenditures over tax and revenue collections. Just like John, if the federal government takes in $3 trillion but spends $4 trillion, it has engaged in deficit spending. The deficit in this case is $1 trillion.

Although it has not happened often in recent years, the federal government sometimes has a surplus.

A federal budget surplus happens when the federal budget shows a positive balance after expenditures have been subtracted from revenues.

Question 8 (multiple choice) Read the scenario. Anna says the tax system needs to be simplified. She says it takes the average US taxpayer approximately 14 hours to complete and file federal taxes. If Anna is correct, which tax would simplify the tax system and maintain equity and efficiency?

A flat tax that does not include deductions

What is the definition of a stock?

a security sold by a corporation in exchange for shares of ownership in the company

While it is unlikely that any tax system could perfectly meet all those criteria, for any tax system to be effective, it must come as close as possible. Over the years, the United States' system of taxation has lost much of its equity and simplicity. As a result, it is also losing some of its efficiency.

A major concern regarding the US tax system is one of equity. What is a fair share? If you follow the news or election campaigns, you will see many different and conflicting headlines about who actually pays taxes in the United States. One common thread seems to be that one group or another feels that it is being taxed too much and that others are being taxed too little. It can be difficult to determine how much each person is actually paying in taxes.

When we look more closely at mandatory spending, it is clear that it makes up the largest percent of the federal budget. However, it is spending that is required by law, so it cannot be cut to decrease the deficit. In 2015, the total budget was $3.7 trillion, and mandatory spending was $2.3 trillion of that budget. Of that $2.3 trillion, $774 billion was paid in Social Security benefits. Together with Medicare and Medicaid, these safety net programs make up the vast majority of the mandatory spending.

A much smaller portion of mandatory spending includes veterans' benefits, unemployment compensation, employee benefits, and a program known as the Supplemental Nutrition Assistance Program (SNAP). This program, which cost the federal government $78 billion in 2011, provides food assistance for families in poverty. In 2010, the average income for a family receiving SNAP assistance was $8,800 per year.

A tax cut for people in Kelly's tax bracket would not have much of an impact on society as a whole because most of their money goes toward necessities, such as rent, groceries, and gasoline.

A tax cut for Noelle could have a greater impact on demand because she is more likely to demand a wider variety of goods. For this reason, when an economy is slowing, the government may consider tax cuts for wealthier individuals to stimulate demand. This is yet another complex and controversial factor influencing the American tax system.

It is common to hear about fiscal policies during a period of economic contraction, or recession. The government uses expansionary policies to stimulate demand. Expansionary policies put money into the economy to stimulate overall demand, which, in turn, expands the economy.

A tax cut for individuals would expand the economy by increasing the amount of money consumers have available to spend. For example, if a family normally has a $1,000 tax bill but that bill is reduced to $700, the family now has an extra $300 to spend in the economy. If 50 million people get an additional $300 to spend, that could lead to $15 billion dollars in spending

For example, some roads require drivers to pay tolls, or fees. Each driver on the road who benefits from the road pays the same amount of tax, or toll, regardless of income. This tax is regressive because lower-income people pay a higher percentage of their income than higher-income people, assuming the same amount of use.

A third type of tax is a proportional tax, or one where the percentage a person pays in taxes stays the same regardless of income. Consider the implications of these taxes for two different people: Kelly, who makes $10,000 per year, and Noelle, who makes $100,000 per year.

Think about a product like a cell phone, which goes from a bunch of raw materials to a finished product that people buy. It went through various levels of production, and, at each level, a tax was added. It started as plastic and glass and ended up as a mini-computer that also makes calls.

Adding a tax at each level of production helps to force each business with a role in its development to accept responsibility for a portion of the tax. All consumers will see, however, is that a product has increased in price. The cell phone that was once $100 is now $110 (or more).

The graphic shows that for 2011, of the $2.3 trillion in revenue that the government received, $1.1 trillion came from the individual income tax. The amount of tax that people pay on their income varies based on a person's income. (Chart (Graph L16 A2))

All income earners have a marginal tax rate, or the rate that applies to the next dollar of taxable income, that determines how much they pay. In other words, if Carla makes $50,000 per year her tax rate might be 25 percent, whereas if Jack makes $90,000 per year his tax rate might be 28 percent. Not only will Jack pay more in taxes, he will also pay a higher percentage of his income in taxes.

Read the statement. _[blank]_ of the Constitution states that the government's collection of income taxes is legal. Which accurately completes the sentence?

Amendment XVI

In the modern era, the Glass-Steagall Act, or the Banking Act of 1933, was passed in the United States to help stabilize banking in the early years of the Great Depression. One of the reasons that banks began to fail during the Depression was because they had financed risky speculations in the stock market.

An important feature of this banking reform was to separate commercial banking and investment banking. According to this legislation, no more than 10 percent of commercial banks' income could be based on securities, or financial holdings like stocks. It also allowed the Federal Reserve to regulate national banks more closely so that banks had to make three reports to them each year.

And it's paid for in a responsible balanced way, in part, for example, by making sure that large hedge funds and private equity firms pay what they owe on taxes, just like everybody else.

And by locking in two years of funding, it should finally free us from the cycle of shutdown threats and last minute fixes. It allows us to, therefore, plan for the future.

Which investment is best for Anisia? Without considering the reason for the investment, there are two factors that she should consider. The first is the potential return she will get, and the second is the risk to the investment. Risk is the chance that an investment will result in a loss. The higher the risk, the higher the potential for loss of the initial investment.

Anisia could make more money if she loans the money to the crowdfund, but she is not certain she will be paid back. On the other hand, she can be nearly certain that the bank will pay her the interest it promises but it won't be as much money. A general rule is that a higher-risk investment offers a higher potential return. This is because it needs to offer a greater incentive to convince people to take the risk.

Finance companies make loans directly to consumers. They do not provide the other services offered by banks, such as holding deposits and helping people make investments. There are many different types of finance companies that focus on a variety of different borrowers. One company may loan only to small businesses.

Another company may focus on servicing people with poor credit ratings. Since these companies do not accept deposits, they are likely borrowing money from others to make loans. This may lead to higher interest rates for the borrower.

The per capita, or per person, income in the United States in 2015 was about $55,800. While that seems like quite a bit of money, it does not reflect the reality for everyone in the country. Some people have very limited financial resources, while others have a great deal of wealth. When the government makes payments to families with limited financial resources, they are redistributing income by taking money from one group and giving it to another.

Another manner in which government spending affects the economy is by providing some services at a lower cost than the private sector. Think about the difference between the costs of a private university versus a public university. When people go to a university, they pay tuition and other fees.

Flat Tax

Another possible tax reform is the flat tax, which is a proportional tax on individual income after a specified threshold has been reached. As an income tax, this is similar to the existing federal income tax. However, it is not progressive. The rate remains flat, or stays the same.

Selling the contract to a financial company is beneficial to the retailer because it does not have to assume the full risk of the loan but can advertise this credit option to potential customers. It also helps the retailer by getting them the money right away instead of having to wait for the loan to be paid off.

Another type of company that provides loans are life insurance companies (v), specifically those that offer whole life insurance. A whole life policy is considered permanent. This means that it lasts as long as you pay the premium. In other words, it lasts for your whole life. The premium is the payment made for the policy.

These banks are more likely to be willing to make very large loans because they are more likely to have large capital reserves. Finally, these banks make loans to people or businesses that bank with them as well as to people or businesses that do not bank with them.

Another type of institution is a savings and loan association, sometimes called S&Ls. This type of institution specializes in accepting deposits and then using those deposits to make real estate loans. The initial idea behind savings and loan associations was to pool the money of a community for the benefit of all.

Principle of Taxation: Ability-to-Pay Arguments For: - People who earn more can better afford to pay. - People who earn more have benefited from society.

Arguments Against: - It penalizes people for working hard and taking risks. - It reduces the incentive to produce more.

Principle of Taxation: Benefit Arguments For: - It seems fair that people who receive a benefit should pay. - People are more willing to pay when they also receive a benefit.

Arguments Against: - It is not always easy to determine who receives the benefit and to what degree. - Some people simply cannot afford to pay.

Which disadvantage of the value-added tax (VAT) is most likely to be cited by people with low incomes?

As a consumption tax, everyone pays the same amount regardless of ability to pay

Local governments may also face unexpected emergencies. For example, the city of Flint, Michigan, had to respond to a problem with the drinking water for its residents. The lead levels in the water were higher than normal, according to federal guidelines. A state of emergency was declared in Flint in December 2015.

As a result of this problem, the city spent resources and time helping citizens find a way to get safe drinking water. Filters and water-testing kits were handed out to citizens free of charge so they could check their water. Even though some federal and state money may be spent to help the city, this particular problem still requires time and labor resources from city employees. As a result, there is both a financial cost and an opportunity cost for the city as it struggles to ensure safe drinking water is available to all of its residents.

In recent years, public support has grown for a balanced budget amendment, which is a constitutional amendment that would require the US government to spend no more than it collects in taxes and other revenues, excluding borrowing.

As an amendment to the US Constitution, this would mean that Congress could not ignore or suspend the rule as it has with past legislation. As a result, the amendment has proven difficult to pass because it requires much more than a majority vote.

Although some of these institutions failed because of their risky practices, they never deliberately set out to fail. They believed that things would work out in the end. To do business, banks accept deposits, but they also borrow money and distribute loans using that money.

As long as they loan out the money at a higher rate than they borrow it, they are profitable. While there were many reasons for the Savings and Loan Crisis, the root of the problem was that S&Ls loaned out money at a lower interest rate than the rate at which they could borrow. This caused them to become financially insolvent, which means that they could no longer meet their financial obligations.

Yet, like taxes, the IRS has roots that stretch further back in the nation's history. Along with the first income taxes collected by the US government, the first official Commissioner of Internal Revenue was appointed in 1862. Both the tax and the position were created to collect revenue to support the American Civil War.

As technology advanced in the 20th century, the IRS adapted new tools to function better. Computerized tax forms replaced mailed 1040s as more of the American population became computer literate.

The majority of individual income taxes are withheld through a payroll withholding system, which automatically deducts income taxes from paychecks on a regular basis. For example, a person pays a portion of her individual income taxes with monies deducted from each of her paychecks.

At the end of the year, that person adds up all the taxes she has already paid and compares this number to the actual taxes she owes. This is done through a tax return, or annual report, filed with local, state, or federal government. The tax return details income earned and taxes owed.

Value-Added Tax

At the simplest level, a VAT is a sales tax because it taxes consumption, or the things people buy, rather than one's income. It is actually a tax added at every stage of the production process. This is where it gets its name. As value is added, a tax is also added.

The other major differences include the ways of distributing money and the absence of some spending categories. For example, education is a significant expense for states, but not for the federal government. Social security does not exist as a spending category at the state level, although state governments do have retirement programs for state employees.

At the state level, a significant portion of the budget is intergovernmental expenditures, or funds that one level of government transfers to another level for spending. This money is collected by the state and then distributed to areas within the state to spend on local needs. States also spend a significant portion of their budgets on public welfare programs, such as Medicaid. These programs are often paid for by the state with supporting funds from the federal government.

These national banks bought government bonds in order to receive their charter. After the banking act, currency issued by banks had to be backed by US government securities. In addition, state banks had to pay a 10 percent tax on their currency. This is one reason why some state banks went out of business. The development of a common currency as a result of the Banking Act of 1863 was an important step toward banking stability.

At the turn of the century, the United States passed the Gold Standard Act of 1900.This meant US currency was backed by a specific amount of gold. It also meant that paper money could only be exchanged for gold, not other metals like silver. The United States remained on the gold standard from 1900 to 1933, when Franklin Roosevelt needed to increase the money supply in order to fight the Great Depression.

It also established the Federal Deposit Insurance Corporation (FDIC), which insures people's deposits in banks so that they do not lose those monies if a bank fails. This act provided some much-needed security when hundreds of banks were failing because they had engaged in risky and speculative practices.

At various points in banking history, some individuals have concluded that banking institutions were subject to overregulation. When there are too many laws and procedures, it can make it difficult for businesses to grow. In times like these, people may argue for deregulation.

At the federal level, individuals are able to use deductions to decrease their taxable individual income. Businesses are able to use accelerated depreciation, or a schedule that spreads depreciation over fewer years than normal, to decrease their corporate income tax. Another way businesses can reduce their taxes is by taking the investment tax credit. This gives them a credit for the purchase of equipment.

At various times, the capital gains tax has been raised or lowered, depending on the political climate. A capital gains tax is one on profits from the sale of an asset held for 12 months or longer. Raising that tax generally causes people with greater wealth to pay more in taxes, and lowering that tax causes them to pay less. Along with the complexity of trying to determine what is fair, there is also the difficulty of navigating the US tax system.

This hands-off, or laissez-faire, approach is one reason there was little government regulation of industry during the Industrial Revolution. It also helps explain why no income tax existed until the passage of the Sixteenth Amendment in 1909. It wasn't until the Great Depression of the 1930s and Franklin D. Roosevelt's New Deal that the US government's role in the economy changed dramatically.

Before the Great Depression, the US government did not have much involvement with handling recessions. It simply let the market sort itself out. When the Great Depression first began, Herbert Hoover was president. At first, he hoped that the economy would correct itself.

But unlike SNAP, TANF is not an entitlement program. This program is run by states, and the federal government grants funds to the states to use. The states are also required to contribute. In 2013, the federal government spent $17 billion on TANF, and the states contributed about $15 billion.

Beyond mandatory and discretionary spending, the government also has to pay interest on its debt. In 2015, that interest was $224 billion dollars. This money is the fee that the United States pays to lenders for borrowing money needed to cover the years of deficit spending.

What is the most likely reason the government would cut corporate income taxes to stimulate the economy?

Businesses would have more money to increase hiriing

What impact could the opening of a military base have on a local economy?

Businesses would spring up to meet the needs of those on the base

These notes were called greenbacks because they were printed in green ink on the back side. This was fiat money, which is money that does not derive its value from gold or silver, but from government decree. These demand notes could be traded in for gold or coin upon demand.

By 1863, the United States was in the middle of fighting the Civil War, and Abraham Lincoln needed to do more to finance the war. The country also needed a solution to its banking problems, so Congress passed the National Banking Act of 1863. This act established national bank charters, created a system where the federal government could sell bonds to raise money, and created a national currency.

Financial intermediaries are an essential component in the circular flow of the financial system.

By accepting deposits and making loans, they facilitate the movement of money from one sector to another that makes economic growth possible.

Along with traditional financial intermediaries, nonbank financial intermediaries facilitate the movement of finances. Sometimes they do this while providing peace of mind for the borrower, as in the case of life insurance

By meeting the needs of consumers in different ways, these groups allow for additional economic growth beyond what traditional institutions contribute.

If their taxes are raised, they will have less money to spend, which means they would be able to demand fewer goods. When millions of consumers are affected, as opposed to just Noelle and Kelly, an increase in taxes can cause a major decrease in demand.

By the same token, if millions of people had their taxes reduced, there would be an increase in aggregate demand because all those people would have more money to spend. This is especially true for Noelle and others in the same tax bracket (level of taxation), who most likely have more money to spend.

While the modern banking system has its roots in the National Bank Act of 1863, the modern central bank has its roots in the Federal Reserve Act of 1913.

By the year 1913, US citizens had reached a consensus about the US banking system: it needed additional structure to make it more stable and less likely to cause economic problems for the country. However, no one could agree on how this stability should be achieved.

What problem does the president face when presenting a budget to Congress?

Congress could pass the budget, but it may not agree with the president's priorities

Congresspeople have a powerful incentive to spend money, especially in their own district. The community benefits from the expenditures, and the member of Congress is then often reelected.

Congresspeople have little incentive to cut programs that benefit their district, but they may argue strongly for cutting programs that benefit other districts. They also have little incentive to increase taxes to pay for their spending. People generally do not vote for the candidate who promises to raise taxes if elected.

Even though the household and business sectors do most of the saving that is used to fund loans, any sector can save. Any sector can also borrow money, but most of the borrowing is done by the business and government sectors.

Consider a loan to a person who wants to start a new restaurant. This new restaurant will employ people as waitstaff, cleaners, and cooks. If the restaurant owner is renting an existing building, they must pay rent. If the owner builds a new building, construction workers, carpenters, electricians, and engineers would need to be hired.

dividend (v)

a share of profits owed to a shareholder

Though the S&L crisis and other banking problems since the 1930s have been hard and expensive lessons, they have led to major improvements in the American banking system.

Deposit insurance now offers much in the way of consumer protection. As a result, in spite of various problems, the US banking industry remains relatively stable and secure.

To bring the debt down, the government will either have to increase revenue, decrease spending, or use a combination of those two options. The debt is complicated when we begin to consider how to raise the revenue and where to cut the spending.

Do current taxpayers need to pay more, or do more people need to pay taxes? Should we cut military spending in the difficult times, or should we cut aid to needy families? There are no easy answers to these problems, but there is no doubt that the issue of the debt must be addressed

The performance of stocks is measured by organizations like the Dow Jones Industrial Average (DJIA), commonly called the Dow, and the Standard and Poor's 500, known as the S&P 500.

Each of these is an index that looks at the performance of a selection of publicly traded companies to give an overall picture of how the market is performing. The DJIA looks at 30 companies across a variety of industries, and the S&P 500 looks at 500 companies. When these indices show the market is falling, it is called a bear market. When these indices show that the market is rising, it is called a bull market.

However, this unstable trading could not last. The tulip exchange crashed. It tumbled down like a house of cards. The speculating on bulbs which had not even been delivered caused irreparable damage. Individuals from both the upper and middle classes lost entire fortunes.

Economists and financial scholars continue to use this episode in history to teach the dangers of speculation in financial markets. In fact, many scholars and investment bankers drew a parallel between the tulip mania which occurred in Holland in the 1630s and the real estate crash which happened in the United States in 2008. Sometimes, history does repeat itself if we do not pay attention and learn.

Scenario: War is declared. Possible Consequence: The government spends money on military expenses.

Effect on Budget: If there is no increase in revenue, the increased spending will lead to deficit spending.

Scenario: The cost of goods inflates rapidly. Possible Consequence: People cannot afford basic necessities.

Effect on Budget: The government chooses to provide assistance but does not raise taxes to offset the cost.

Scenario: The unemployment rate rises to 10 percent during a recession. Possible Consequence: Fewer people pay income tax.

Effect on Budget: There will be a drop in tax revenue, and if spending is not cut, there will be a deficit.

American government has undoubtedly been inspired by the Declaration of Independence. That founding document calls for protection of "unalienable Rights ... Life, Liberty, and the pursuit of Happiness."

Efforts to make this ideal a reality have led the government to enact numerous programs to help people in need.

All of these questions help investors make wise decisions. One very important investment decision that requires careful consideration is how to save for retirement. Many people prefer to stop working at some point, but they will still need a source of income when there is no longer a salary.

Even people who have been paying into Social Security and will receive that retirement income may want to have additional retirement funds to feel secure once they stop working. One popular retirement option that some companies offer is known as a 401(k).

The Federal Home Loan Bank Board (FHLBB) handled the oversight of S&Ls, and they were insured by the Federal Savings and Loan Insurance Corporation (FSLIC), which was part of the FHLBB. The regulation of these S&Ls was weak, and many of these organizations began to engage in risky practices.

Even then, the FHLBB and FSLIC continued to allow these institutions to exist and provide insurance. When these S&Ls eventually failed, the taxpayers ended up paying out the insurance claims. In addition, many of these S&Ls were dishonest about their financial problems. This led to many lawsuits from defrauded companies. In some instances, the people in charge of these institutions were jailed for their actions.

How much can I afford to save?

Everyone has expenses to cover. It is important to consider the income and expenses you face so that you know how much money is available to invest.

For example, homeowners now can deduct interest they pay on home loans. This encourages people to make the large investment in buying a home, and this is an important segment of the US economy. Would the elimination of that deduction have a negative impact on the housing industry? Nobody knows for certain, and this makes people afraid to take that risk.

Finally, a proportional tax can place a tremendous burden on lower-income individuals if the rate is too high. But keep in mind that the rate has to be high enough to continue to collect the revenue that the government needs to pay its bills.

What most economists do agree on are the three criteria of effective taxes: equity, efficiency, and simplicity. For a tax to be equitable, it should be fair and impartial. When there are tax loopholes, or exceptions in the law that allow a taxpayer to avoid paying, then the tax is not equitable. For a tax to be efficient, it should be easy to collect and produce a reasonable amount of revenue.

Finally, for a tax to be simple, everyone should be able to understand it. Some people argue that the United States has lost some of these components over the years as the number of loopholes have risen and the time it takes to complete a tax return has increased. As a result, discussions about the best ways to reform the tax code are ongoing.

In the United States there are many levels of government. The federal government makes and enforces laws that apply to the nation as a whole. Each of the 50 states also has its own government that makes and enforces laws for that state.

Finally, there are a variety of local governments at the county, city, and town levels that make rules for that particular area. All of these systems have to raise revenue in order to function, or to make and enforce laws.

In addition to accepting direct applications for loans, these companies also purchase installment contracts. These are contracts for loans provided by a retailer to pay for an item in installments over time.

For example, a person may need a washer and dryer but he or she does not have the funds to pay for them. A retailer may offer an installment loan so the borrower can receive the washer and dryer immediately and pay for them later in installments. This can lead to a much higher overall cost for the products because of the interest charged on the payments.

Fiscal policy can be a useful tool for managing the economy, but it is not always easy to use. Discretionary fiscal policies must be suggested and implemented by the legislative and executive branches of government. These two branches are often in disagreement about the best way to manage the economy.

For example, if the two groups could even agree that tax cuts are appropriate, they may still disagree about who should receive those tax cuts or how large they should be. Finally, when the government increases spending for any reason, it is very difficult to cut that spending later.

Local governments include levels of government below the state level. They may be counties, cities, or towns. A much wider variety of services and expenditures exist at the local level because there is more variety in the size and type of area. Some areas, like New York City, are bigger than some states. On the other hand, some areas can be very small, serving only a few thousand people. These areas spend money similar to state governments, but the distribution of funds is different.

For example, the largest percentage of local budgets go to support elementary and secondary education. A much smaller portion of local budgets goes to higher education. At the local level, public welfare programs also make up a small part of the budget compared to states. On the other hand, local governments may need to spend a significant part of their budgets on things like trash collection or water services. These are known as utilities. Local governments are also likely to spend a large percentage of their budgets on police and fire protection

Mandatory spending is federal spending authorized by law that continues without the need for annual approvals by Congress. It includes entitlement programs, such as Social Security and Medicare. Medicaid, which is a health care program for low-income individuals, runs jointly with the states and is a part of mandatory spending; however, only the federal share is included in the budget. The mandatory spending is included in the budget request sent to Congress, but only to make requests.

For example, they may request changes to eligibility. The money must be spent (hence the term mandatory) as spelled out by existing law unless, or until, Congress passes new laws stating otherwise.

deficit (v)

a shortfall of income; negative difference between cash inflows and outflows

The final function of money is to act as a store of value. This means it maintains its worth over time. If my grandmother gives me $100 for graduation, I can keep that money for a year, and it will still be accepted when I try to buy something with it. Remember Isaac's eggs?

He cannot keep those for a year and expect to use them as a medium of exchange. It is important to note that money does not store its value exactly. Inflation causes fluctuation in the value of a dollar, but it retains most of its value as long as inflation is not too high.

What impact can taxes have on the economy?

Higher taxes reduce demand because consumers have less money to spend

In a circular flow model of financial activity, financial intermediaries facilitate the movement of money from savers to borrowers. Most people are familiar with traditional intermediaries, such as banks and credit unions.

However, other types of nonbank financial intermediaries also participate in this system. They include finance companies, life insurance companies, and pension funds.

Because the government, or public sector, spends trillions of dollars every year, where and how it chooses to spend its money has a dramatic impact on the United States economy and how resources are allocated, or used. To better understand this relationship, consider the impact of both the opening and closing of a military base.

If a base opens in a small town, private individuals may use their resources to open businesses that support the base. For example, someone may open a restaurant or a dry cleaning shop near the base. Once the resources of those business owners are used in that area, they are not being used elsewhere. Those business owners made a decision about the use of their resources because of where the government chose to spend its money.

When do I need the money?

If you need the money next week, you will want to keep it liquid. This means the investments can easily be turned into cash. In addition, that is usually not enough time to make gains in higher-risk investments.

The purpose of the bank was to help develop a uniform currency, lend money to the US government when needed, and hold the deposits of the US government. A central bank is necessarily large and powerful. As a result, it was opposed by the Anti-Federalists, led by Thomas Jefferson.

In 1811, the charter of the central bank expired, and it was not renewed. By 1816, however, a Second Bank of the United States was chartered. But there was still opposition to central banking from those who feared the power of a strong central government. This Second bank was dissolved during the presidency of Andrew Jackson, who took office in 1828. That marked the end of central banking in the United States until the development of the Federal Reserve in 1913.

The creation of the federal budget is a complex process. This is because of the magnitude of the dollar amounts involved and the political pitfalls the budget faces along the path to approval.

In fact, the federal government might not even pass a budget in the time frame required by law. If it does not, it can pass temporary spending measures called continuing resolutions (v) that allow government agencies to keep operating until a budget is passed. While this prevents the government from shutting down, it can create uncertainty within the government, which could make it difficult to operate.

If that military base eventually closes, those businesses may not survive without all their military customers. As a result, those business owners would have to shift their resources elsewhere. In this way, the government is also impacting individuals and their income. When that restaurant closes because the military base leaves, the people who own the restaurant may have lost their sole source of income.

In fact, the government can have a powerful impact on the distribution of income, or the way in which the nation's income is divided among families, individuals, or other designated groups. In terms of the military base, income was distributed to that small community when the base opened. The government can also play a more direct role in the redistribution of income.

Central Banking

In order to understand the full history of banking in the United States, it is helpful to start with the development of central banking. Once the United States was founded and the Constitution had been ratified, Alexander Hamilton, a member of the Federalist Party, argued successfully for the creation of the First Bank of the United States. It received its charter, or authority to exist and operate, from the federal government.

Debt is money that is owed, and just like individuals and businesses, governments can take on debt.

In recent decades, the federal debt has become a particularly controversial and complex topic in the United States political landscape because of its size and the ongoing debate about how to decrease it.

When the government's expenses exceed its revenue, there is a deficit. When the reverse is true and government revenue exceeds expenses, there is a surplus.

In recent history, the government is more likely to have a budget deficit than a surplus. As a result of those years of deficit spending, the United States federal government has a national debt of more than $19 trillion.

For example, a program that provides medical care to people living in poverty might not know which services to provide, since its funding could be cut in the near future.

In the United States, no comprehensive budget process existed prior to 1921. Before the Budget and Accounting Act was passed that year, federal agencies generally sent budget requests to the appropriate congressional committee. Now, the budget process begins in the executive branch, where the Office of Management and Budget (OMB) prepares a budget based on the president's priorities.

Congress later passed the Budget Enforcement Act in 1990. This act required that Congress have the funds available for any new spending or tax cuts. The act enjoyed some success in the 1990s, but was ultimately not successful in the long run and expired in 2002. One of the reasons it failed was that it required Congress to avoid cutting taxes unless it was able to offset the cuts. However, the Congress of the early 2000s believed tax cuts would stimulate the economy, and thus it tended to keep them.

In the mid-1990s, Congress gave the president the ability to use a line-item, or partial, veto. This type of veto allowed the president to reject portions of a budget without rejecting the entire budget. Later, this was found to be a violation of the separation of powers

Luxury tax (v)

a special tax that is imposed on expensive goods

Federal Reserve Act

In the midst of developing a common currency, banking panics and financial problems continued to plague the US government. It eventually came to the conclusion that the banking system needed stability beyond what a common currency offers. The Federal Reserve Act was passed in 1913. This created a new, decentralized central bank that could help manage the banking system and the money supply. It had regional banks in different parts of the country and it brought important stability to the banking system.

Income and taxable income are two different things. The income a person makes is how much money he or she earns. The taxable income is the part of that person's money that is subject to income tax.

Income that is paid into Social Security and Medicare, for example, is not subject to tax. Other portions of income are also not subject to tax.

The tax system of the United States, with its many rules regarding credits, deductions, and depreciations, is highly complicated. This violates the principle of simplicity, which is important for an effective method of taxation. It also makes the system less efficient.

Individuals and businesses must spend a lot of time calculating their taxes. In addition, the government has to spend resources ensuring that those individuals and businesses paid their taxes correctly and on time.

The funds in a 401(k) are invested in a variety of ways, just like other investments. Remember, the earlier Tom starts investing, the longer he has for his money to grow. This will help provide security and stability for Tom when he retires.

Investments are not complicated, but to get the most out of them, it is helpful to set goals and consider a variety of investment options. Many banks, investment firms, and even employers offer information and guidance for people who take the time to ask.

Even with oversight by the citizens' elected representatives, the IRS is still one of the most feared and reviled offices of the US federal government. Receiving letters, emails, or telephone calls from the IRS seems to elicit the same response from the majority of American citizens: anxiety and fear.

It also makes April 15, the deadline for submitting tax returns to the IRS, an important day for citizens. Depending on whether they expect to pay additional taxes or receive a refund on taxes withheld throughout the previous year, it can be a day of anxiety or relief for Americans throughout the nation. Regardless, the IRS is a necessary part of the US federal government and is vital to the survival of the country.

What is the purpose of the Internal Revenue Service?

It collects income taxes for the federal government

Just like people generate an income and use it to pay their expenses, the United States federal government must generate money to pay for its expenses.

It does this by collecting tax revenue, and when expenses exceed that tax revenue, it also borrows money.

Which is a way the United States' federal debt impacts its economy?

It has a negative impact because the federal government has to make large interest payments on that debt

Over time, money has evolved into the forms we see today. In the United States, currency consists of both coin and paper money, which together serve well most of the functions of money.

It has value because it is backed by the United States government. As long as it continues to work as a store of value, it will serve as a convenient medium of exchange for goods and services.

Over the years, attempts have been made to limit deficit spending and deal with the US government's debt. One of these is commonly referred to as the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act, which was passed by Congress in 1985.

It included a provision that required a balanced budget unless there was an economic decline. Congress, however, discovered a number of ways to get around the balancing requirement, and so the act was not very successful.

What is true of education spending?

It is a significant expense of state governments

In addition to offering incentives to save, financial intermediaries are able to pool people's funds to make loans. When one depositor needs to pull out money, hundreds of other depositors do not. Financial intermediaries can also look for the best ways to use money and receive applications to borrow it.

It is important that money is loaned to people who are very likely to pay it back. If a bank consistently loans money to people who cannot pay it back, they could go out of business. These intermediaries are also able to provide conveniences. They can electronically transfer funds from a loan, cash payments and checks, and even collect assets to help cover any losses if a business were to fail.

Banks still offer people the option of writing checks against their account, but account holders rely more heavily on their debit cards. These can be used to access the money in checking and savings accounts directly at stores, online, or through automatic teller machines (ATMs). These transactions usually require the input of a secure PIN. Today's newer debit and credit cards include a chip that makes it more difficult for thieves to steal PINs and access accounts.

It is important to remember that banks and other deposit institutions hold a great deal of your personal information, and, of course, your money. New technologies provide convenient options for people, but they also carry risk. Hackers have been known to break into banks to steal personal information and commit identity theft. They also use tricks to watch people input their PINs so that they can access their accounts. Although modern banking provides many conveniences, it also requires customers to monitor their accounts carefully and use all the security options offered.

Other taxes that are owed and generally withheld through the withholding system are FICA taxes. These taxes are paid as a result of the Federal Insurance Contributions Act (FICA). This is a tax levied on employers and employees to support Social Security and Medicare. A certain portion of your income is withheld and returned to people later, usually when they retire.

It is not just one's wages that are subject to tax. Money made from investments is also taxed, as is money made from the sale of property. There is also a gift tax, which is a tax paid by a donor on gifts of money or wealth over a certain amount or value. You might be asking yourself, "Why would the government make a person who made a donation pay a tax on the donation?" If the government did not tax donations, donors would be able to avoid paying some of their taxes by simply gifting large amounts of money to other people.

Which is a feature of a flat tax?

It is not progressive and remains the same for all consumers

Which is an argument against implementing a value-added tax (VAT)?

It places an unfair burden on people with lower incomes

Someone has to compute, collect, and count the tax money for the US federal government. Enter the Internal Revenue Service (IRS). This office operates under the executive branch of the US federal government within the Department of the Treasury.

It was created in 1913 with the ratification of Amendment XVI, which provides the US government with the power to levy and collect taxes.

Other times, fiscal policies are developed by Congress, or the executive branch, in response to economic conditions. These are called discretionary fiscal policies, and they are enacted by the government. An example of a discretionary fiscal policy would be the American Recovery and Reinvestment Act.

It was signed into law in February 2009 to help stabilize the US economy after the recession that started at the end of 2007. The act provided money for federal programs, extended some benefits, and reduced some taxes for families and businesses. These were changes enacted by the government to stimulate the economy and recover from a very severe recession.

Read the sentence. Some states collect a sin tax on products like alcohol and tobacco. What outcome would a state expect when levying a sin tax?

It would expect a decrease in demand

"Last week, Democrats and Republicans came together to set up a responsible long-term budget process. And what we now see is a budget that reflects our values, that grows our economy, creates jobs, and keeps America safe.

It's going to strengthen the middle class by investing in critical areas like education and job training, basic research. It keeps us safe by investing in our national security and making sure that our troops get what they need in order to keep us safe and perform all of the outstanding duties that they do around the world. It protects our seniors by avoiding harmful cuts to Medicare and Social Security.

Classification of Tax: Proportional

Kelly's Tax Bill: Kelly would pay 10% of her taxable income. Tax Bill = $1,000 Noelle's Tax Bill: Noelle would pay 10% of her taxable income. Tax Bill = $10,000

Classification of Tax: Regressive

Kelly's Tax Bill: Kelly would pay 10% of her taxable income. Tax Bill = $1,000 Noelle's Tax Bill: Noelle would pay 5% of her taxable income. Tax Bill = $5,000

Classification of Tax: Progressive

Kelly's Tax Bill: Kelly would pay 5% of her taxable income. Tax Bill = $500 Noelle's Tax Bill: Noelle would pay 20% of her taxable income. Tax Bill = $20,000

Unfunded mandate (v)

a state requirement that is not supported financially by the federal government

deposit (v)

a sum of money placed into a bank account

The main problem Congress faces when attempting to control spending is determining which programs to cut. This is a difficult choice. For example, military spending is currently the largest portion of discretionary spending, but many people are fearful of cutting money from the military, particularly in light of increasing concerns about terrorism. Raising taxes to pay the deficit also tends to be unpopular

Many Americans already feel they pay more than their fair share in taxes. In fact, a recent Gallup Public Opinion Poll showed that 57 percent of Americans believe their taxes are too high. This means that members of Congress who suggest specific spending cuts or tax increases to stop deficit spending may find that their constituents will not vote for them in future elections.

In addition, these apps offer a variety of tools to help people track and manage their money. They include budgeting and tracking tools so that people can see where they are spending their money. They also offer automatic bill pay services and alert systems to warn customers when their accounts hit a low, preset threshold. For example, customers can set up the app to notify them when their accounts go below $50.

Many banks also allow people the opportunity to apply for loans online. If the loan is small enough, the applicants may be allowed to complete the entire process online or over the phone. However, larger loans, like home mortgages, are still a complicated legal process that require people to sign papers and present identification in person.

They consider deposits to be purchases of stock, and so they pay dividends on the deposits that people keep there. They also make loans for real estate, automobiles, and other things, but they may not offer all the services that commercial banks do. In addition, they only make loans to people who are members of the credit union.

Modern banking is becoming more and more convenient every day. The traditional brick-and-mortar bank is now giving way to mobile services. Most banks offer apps for smartphones that allow customers to deposit checks from any location by taking a photograph of the check. These apps also receive direct deposits for paychecks and offer the ability to transfer funds from one account to another.

When the government collects taxes and then spends that money, it is collecting a resource (money) and allocating that resource to accomplish goals. For example, a freeway may be an important addition to a large city with a lot of traffic. People are not likely to come together to contribute money to a big pool of funds and then hire a contractor to build a freeway, but it may be necessary

Most people would agree that the freeway benefits the people and businesses in that city. Other allocations are more controversial. For example, farmers receive subsidies to continue producing food and other products that people need. These subsidies help to keep the cost of food low and the production of food in the United States running smoothly. However, some people feel that the government should not spend tax dollars in this way.

Read the sentence. The largest percentage of local government budgets goes to support _[blank]_. Which best completes the sentence?

Not: Welfare Programs

And I want to thank, in particular, the staffs of both Democratic and Republican leaders in both the House and the Senate because they worked overtime to get this done. I want to thank my own staff, in particular Katie Fallon and Brian Deese, who are standing in the back. They gave up a bunch of lost weekends to make this happen. But they did an outstanding job. We're very proud of them.

OK. Thank you very much everybody." ~ Barack Obama

In 1636, the exchanges actually began speculating on tulips. This meant that traders were buying and selling tulips that they did not even own. Speculating on tulips caused the prices to artificially inflate. As such, the only individuals who made money in these transactions were the traders.

Observers of the exchanges compared them to gambling dens. The wild speculation drove the public madness for tulips to new heights. At one point middle class buyers were literally selling their homes and possessions in order to purchase tulips. In some cases, people used tulip bulbs for currency.

Another common practice is called earmarking. While different from pork barrel spending, it is also controversial. An earmark is when Congress specifically says where the money should be used rather than leaving it to the executive branch to decide. On the one hand, a member of Congress could earmark to benefit the area they serve.

On the other hand, they could simply want to be more direct about where the money should be spent. The important difference is that pork barrel spending uses additional money, which can lead to excess. Earmarking uses money that has already been appropriated, so it won't create an additional cost to taxpayers.

This budget is a request made to Congress, and it estimates spending, revenue, and borrowing for the next fiscal year. The fiscal year for the federal government is a 12-month planning period that begins on October 1 and ends on September 30 of the next year.

Once the budget request is prepared, it is sent to the legislative branch of the government. This is where things may become complicated from a political standpoint. The president has a set of priorities that are in line with the priorities of his political party. Members of Congress also have priorities that are in line with their political party.

The main advantage of the flat tax is how easy it is to calculate. If a person knows his or her income is $50,000 and the flat tax rate is 10 percent, then that person can easily calculate his or her tax bill.

One disadvantage of the flat tax is that it is difficult to know what will happen to some types of economic activity. This is because a flat tax eliminates the deductions individuals and businesses can take to reduce their tax bills. Those deductions came about to encourage some type of behavior.

Marginal tax rate (v)

a system in which tax rates vary depending on a person's income

On the other hand, common stockholders have the potential to make a greater return on their investment because they have taken a greater risk. There are a couple of other differences too.

One is that common stockholders can vote for the board of directors, and preferred stockholders cannot. The other is that preferred stockholders receive fixed dividends, and common stockholders do not.

The cumulative effect of all of these actions has led to massive debt. This national debt negatively affects the US economy as a whole

One of the biggest problems with such a large debt is that portions of the bill have to be paid eventually. This means that, while people are benefiting in the moment, future generations will have to pay for it. In addition, the federal government has to make large yearly interest payments on the debt. In all likelihood, attempts to reduce the national debt will result in a heavier tax burden in the future, which will limit the ability of future generations to thrive financially.

When people save or invest money, they are gaining financial assets. These are the deposits they have and the securities they own, like stocks and bonds. When people save money in deposits, they usually save it in financial intermediaries. These are the banks, savings and loans, and credit unions that store money. Of course, they do not store money to be kind. They do this to make a profit.

One way they make profits storing money is by lending out a portion of it to others and receiving interest in return. A person may also receive an interest payment for storing money with a financial intermediary, but it will be less than the intermediary charges for loaning it out. The amount of interest a person receives depends on factors like risk and liquidity.

Like the federal government, state and local governments collect revenue through taxes and spend that money to support citizens. However, their spending is different from federal spending in a number of ways. One of the most important differences is the requirement some states have in place to avoid deficit spending.

Only a few states have gone so far as to amend their constitutions to include a balanced budget amendment. But most have some mechanism in place to prevent expenditures from exceeding revenue

Which explains why cutting the federal budget is difficult?

Only discretionary spending can be cut, and it is a smaller portion of the budget

The FDIC was established as part of the Banking Act of 1933 to provide banking stability and reassure consumers that it was safe to keep their money in a bank. As an insurance corporation, it protects the deposits of individuals up to $250,000

Over time, it has had to manage the dissolution of many depository institutions, but it has also always ensured that people receive their covered deposits. It also handles the dissolution of these banks as quietly as possible, behind the scenes, to protect the public. If someone's bank is dissolved, the person may find out only when they are informed that their funds are at a new bank.

16 - Allowed all income to be taxed

PASSED BY CONGRESS July 2, 1909 RATIFIED February 3, 1913 AMENDMENT XVI The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. SIGNIFICANCE Amendment XVI was passed during the same year that the government created the Federal Reserve System. The amendment was passed to aid Congress in raising revenue to provide for governmental operations. This amendment replaced previous legislation that outlawed "direct taxes" (see Article I, Section 9) but allowed for a flat tax on income. The Sixteenth Amendment also allowed for revenue laws that taxed business income. In addition, it counteracted a Supreme Court ruling of Pollock v. Farmers' Loan & Trust Co. (1895) that the federal income tax at that time was unconstitutional.

In addition to the rise and fall of central banks, there were many local and state banks developing in the United States. There was a lack of stability with these banks. As a result, banking panics were common. Additionally, the United States only issued coins.

Paper money was printed and issued by the banks, but each of these banks developed their own currency. Not only that, but a single bank could have multiple types of currency. By the time of the Civil War, there were between 8,000 and 9,000 types of currency circulating in the United States. Fraud and counterfeiting were common problems in this era.

Which act enacted by President Barack Obama includes expanded access to private and public health insurance for citizens, yet continues to be a point of contention both politically and socially?

Patient Protection and Affordable Care Act

What is an argument against the benefit taxation principle?

People who earn less money simply cannot afford to pay for some benefits

Type of Fiscal Policy: Contractionary When It Is Used: Rapid inflation

Possible Action: - tax increases for individuals, families - tax increases for companies - decrease in government spending

Type of Fiscal Policy: Expansionary When It Is Used: Economic slowdown

Possible Action: - tax cuts for individuals, families - tax cuts for companies - increase in government spending

American Money

Prior to the Civil War, there were many different types of currency floating around and there was no one to control the amount of money in circulation. At the start of the Civil War, prior to the Banking Act of 1863, the United States government began issuing demand notes, or greenbacks, to help finance the war.

Which accurately describes differences between state and local government expenditures?

Public welfare programs at the local level make up a small part of the budget compared to the state level

Anything above zero indicates a budget surplus, and anything below zero indicates a deficit. This chart also shows the average deficit with the dashed line. In particular, you may notice the deep deficit spending around the time of the most recent recession in 2007. You can also see the increase in deficit spending when the 2001 tax cuts took effect. The US government went from a budget surplus to a budget deficit.

Remember, deficit spending leads to debt. The greater the deficit spending, the greater the debt. The following chart shows the increase in the US national debt since 1966.

Also adding to the complexity of the tax system is the fact that taxes have an impact on the economy as a whole and not just on the individual. Look at Kelly and Noelle in a progressive tax system similar to that of the United States.

Remember, Kelly paid $500 in taxes, and Noelle paid $20,000 in taxes. Higher taxes have a tendency to slow something called aggregate demand, or the combined demand of all consumers. Together, Kelly and Noelle are giving $20,500 to the government, which they cannot use to buy, or demand, anything.

Automatic bill pay (v)

a system people can use to have their bank transfer money from their bank account to pay bills at scheduled times each month

How does the circular flow of the financial system work?

Savers deposit funds into financial intermediaries, who then lend a portion to borrowers

Receipts of income and expenditures increased as a result of the changes in the role of government. The following chart shows that in 1900, receipts and expenditures were nearly equal, and less than five percent of gross domestic product (GDP).

Since 1930, government spending has generally been greater than government income, and spending has been much closer to 25 percent of GDP. The spikes in government spending around 1918 and 1942 coincide with World War I and World War II, respectively.

This puts us on a responsible path. And it makes sure that the American people are the beneficiaries.

So I very much appreciate their work. Let's keep it going. With that, I'm going to sign it. There we go.

So I very much appreciate the work that the Democratic and Republican leaders did to get this to my desk. I think it is a signal of how Washington should work. And my hope is now that they build on this agreement with spending bills that also invest in America's priorities, without getting sidetracked by a whole bunch of ideological issues that have nothing to do with our budget.

So this is just the first step between now and in the middle of December before the Christmas break. The appropriators are going to have to do their job. They're going to have to come up with spending bills, but this provides them the guideposts and the baseline with which to do that. And I'm confident that they can get it done on time. And there's no better Christmas present for the American people because this will allow the kind of stability and will allow the economy to grow at a time when you've got a great weakness in economies around the world.

The final example of a nonbank financial intermediary is a pension fund. A pension is a retirement benefit that employees receive through their employers. The pension fund is the account that pays the pensions of the people who retire. Over the years, a pension fund takes in money from people's paychecks.

That money is deposited in a fund that invests the money on the behalf of all of the pensioners. The manager of the pension is tasked with investing the monies in high-quality stocks and bonds and diversifying those investments to mitigate, or lessen, risk. These investments allow the money to grow in value.

A 401(k) (v) takes contributions directly from an individual's paycheck. This actually happens before taxes, which means the employee is deferring the taxes. In other words, if Tom makes $1,000 in a pay period, but $100 goes to his 401(k), Tom actually pays income tax on $900 right away. Later, when Tom cashes in his 401(k) at retirement, he will pay the taxes on that $100 and the other contributions he made over the years.

Some employers also match a portion of an employee's contribution. The match could be 20 percent, 50 percent, or even 100 percent. If Tom's employer provides 100 percent matching contribution, it means that for every $100 Tom puts in, his employer will put in $100 more.

The money collected in taxes keeps the US government operating and functioning. The federal budget is based on the revenue collected in taxes each year. Tax dollars pay for such items as military pay, upkeep for national parks, and the cost of maintaining government websites.

Some individuals protest the federal government's activities by not paying their taxes. This is a federal offense, but some claim it as a form of free speech. Since the implementation of income tax, there have been tax protesters in the United States.

Notice that in every scenario, Noelle pays more total dollars in taxes than Kelly. This makes sense, because Noelle makes 10 times as much money as Kelly. The difference is in the percentages of income taken.

Some people will say that a system that takes a higher percentage from Noelle is unfair because it penalizes people for working hard. Others will say that Kelly works hard too, and these taxes could actually keep her from ever getting ahead because the burden is greater even though the dollar amount is smaller. There is no easy answer for what is truly fair.

There are other sources of tax revenue that states and localities commonly use. One major source of revenue for many states or localities is a property tax. This revenue is collected from people who own property, like homes and land, and it is most often used to pay for public services like schools and police.

Some states also collect corporate and personal income tax. In addition, they may collect a fuel tax or various estate or inheritance taxes. It is important to note that states and localities have different approaches to revenue based on the preferences within the state.

It could also be that the company is not doing as well as people expected it to. When a stock is in short supply, it may be because the economy is doing very well or the company is very profitable. It could also be due to people believing the company is coming out with a new product that will be very popular.

Stock is purchased on a stock exchange, also called a stock market. This is a market where securities are bought and sold, and companies can choose which stock exchange they use to sell their stocks. There are many different stock exchanges in the world.

Securities are financial instruments that represent some type of value. One type of security is a stock, which is a piece, or share, of a company.

Stock ownership is equity ownership because you own that piece of the company. Stocks can only be issued by corporations.

This $250 profit from the sale of this investment would be known as capital gains. These types of profits are the main reason most people buy and sell stocks

Stocks gain or lose value based on a variety of factors that boil down to the laws of supply and demand. When too much of a stock is available, it will decrease in price. When too little of a stock is available, it will increase in price. There may be too much of a stock because people think the economy is going bad, and they do not want to invest.

If a person paid more in taxes than she actually owed, she would get a refund of that money. If a person paid less than what she owed, she would have to make an additional payment to the government.

That payment usually has to be made on, or near, a deadline of April 15 every year. The amount paid is called a person's average tax rate, or effective tax rate. It is calculated by dividing the total taxes paid by that person by the amount of their taxable income.

In what way could tax policy be used to slow a rapidly growing economy?

Taxes could be raised to decrease the money in circulation

A sales tax is a tax levied on a product at the time of sale. They are generally used by states and localities to generate revenue. The majority of the time, you pay this sales tax when you purchase something. For example, if you decided to buy a basketball, the price tag may say $20, but when you go to the register the cashier will say you owe $21.96.

That is because there is also a 9.8 percent sales tax associated with the purchase. So, $20 goes to the store and manufacturer and $1.96 goes to state and local governments. Sales taxes can be different from one area to another because different tax rates have been applied. Not all states use a sales tax, but it is very common.

Alternatively, tax rates could be raised now to eliminate deficit spending and reduce the debt. This option, however, would decrease the money people have to spend now, which could slow down the economy. The government also has to borrow the money needed to deficit spend.

That means it is competing with other people for the available funds. This could lead to an increase in interest rates. The large debt also affects people's confidence and willingness to invest. Such uncertainty has a negative impact on economic growth.

financial system (v)

a system that allows money to pass between lenders, investors, and borrowers

Value-added tax

a tax collected at each point of the production process and added to a product's sale price

Many people still feared a strong, centralized authority that they felt would have too much power. The solution was contained in the Federal Reserve Act of 1913. The act established the Federal Reserve System (commonly called "the Fed"), the central bank of the US government; this bank would also eventually conduct monetary policy on the government's behalf. The Federal Reserve was made to be largely independent of government control, in terms of both its financial well-being and its decision-making authority.

The Fed is managed by a Board of Governors and 12 regional Federal Reserve Banks, which are distributed throughout the United States. These regional banks operate independently—a move that helped ease the concerns that some people had about an overpowering central US bank. The act also created the national currency of Federal Reserve Notes.

As part of this, the government spends a large amount of money on defense. The government buys labor in the form of military service members and other personnel. It also has to buy the items that these people need to do their jobs. From copy machines to advanced air defense missile systems, many items are needed by the military to do its complex job.

The US government must provide those items. Sometimes, the US government is also a supplier to other countries and businesses. For example, it may sell military supplies to US allies, such as France and the United Kingdom. The US government is both a consumer and a supplier in many other areas beyond defense spending, including transportation, education, and more.

All of these characteristics of money are important, but the issue of limited availability is a bit more complex than the other characteristics.

The United States money supply is managed by the Federal Reserve, which determines how much money is in circulation. They do this to ensure there is enough money to keep the economy growing, but not so much money that the dollar loses its value.

When money is tied to gold, it can only be increased when there is more gold. When it is not tied to gold, more money can be printed at will.

The United States was not completely off the gold standard until 1971, when President Richard Nixon said that the United States would no longer convert dollars to gold at fixed prices.

Legitimate arguments can be made for both principles. On the one hand, the ability-to-pay principle points out that a $10 tax to a person living below the poverty line could be a greater burden than a $100 tax to a person with greater wealth. On the other hand, a tax that is too high can actually be a disincentive to people to work hard and produce more.

The benefit principle suggests that people should pay for what they receive—a notion that seems reasonable enough. Of course, not everyone can afford to do that. Homeless and impoverished people, for example, usually cannot afford to pay a tax for any services they receive. It is a complex issue.

Because members of Congress serve a particular state or district, they may be inclined to use funds collected nationally in a way that benefits their districts. This is called pork barrel spending. This type of spending is often a line item hidden in a larger bill. A famous example of pork barrel spending is the "bridge to nowhere," which would have connected two small towns in Alaska

The bridge would have cost more than $300 million dollars to build and been funded by the nation as a whole. Although the nation would have paid the construction costs, the bridge would only have benefited fewer than 10,000 people in Alaska. Many people are concerned that this type of pork barrel spending leads to excessive government spending.

When Congress is controlled by members of one party and the presidency is controlled by a member of an opposing party, a great deal of conflict usually exists in terms of priorities. This means the budget request may not reflect the interests of members of Congress. This, in turn, may make a budget difficult to pass.

The budget committees in both houses of Congress, the House of Representatives and the Senate, receive the budget request in February. Congressional committees from both houses have to review the budget, meet with various executive agencies, and submit information to their respective budget committees. After that, each house passes a resolution.

Next, both houses come together to reconcile any differences between their resolutions. An important point to note is that this resolution is not a bill. It does not go to the president for a signature and does not become a law.

The budget resolution is in place by mid-April, and financial targets for different parts of the budget will have been set. Keep in mind that money has not actually been allocated at this point. Once the budget resolution is passed, money is allocated through appropriations bills, which earmark funds for certain purposes. To manage this part of the process, each house of Congress has an appropriations committee.

These flowers were all the rage. Tulips became so popular in the Netherlands that in 1634, it was seen as bad manners for a person of wealth to not own one. This trend soon trickled down to the middle classes. Here, the tulip craze rose to a fever pitch. Tulips steadily increased in value each year until the bulbs of some species were more valuable than houses and ships.

The demand for tulip flowers and bulbs was so great that a separate exchange was created just for them. Like our current stock market, this bulb market traded, bought, and sold these rare plants.

This means that Anisia's $100 turned into $1,600 without Anisia doing anything. She did not add any more of her own money and simply left it alone. In this particular case, her investment doubled every eight years (If you divide 72 by the interest as a whole number, you get eight. You can assume it will double every eight years).

The early investment pays off for her. Of course, this is an estimate, but it helps make decisions. Also, notice that if Anisia's twin sister, Maribel, waited until 2023 to invest $100, she would only have $800 when Anisia has twice that amount.

When the United States was formed in the 1700s, it was a union of states, each with many different interests. The states wanted to ensure that the federal government did not have too much power or authority.

The expectation was that the role of the federal government should be limited, and this included involvement in the economy.

This chart (Chart (Graph L18 A4)) shows the debt as a percent of the nation's gross domestic product (GDP). As you can see, since the recession of 2007, the debt has gone well beyond 50 percent of GDP and is well above average.

The federal government borrows a lot of money to cover its deficit spending, and this can have consequences well beyond the American people having to eventually pay this money back. First, there is concern about who should pay the bill. Some argue for increased taxes on the wealthy or corporations, while others say that this would slow growth and eliminate jobs. In addition, if taxes are increased, it would take disposable income from people and could negatively impact demand.

A fundamental difference between the two sectors has to do with motivation. Individuals in the private sector are largely motivated by profit. Government entities, which are in the public sector, are largely motivated by what may benefit the general public and by trying to ensure equity. As a result, the buying and selling behavior of government agencies may be different from the behavior of individuals and businesses in the private sector.

The federal government spends more than three trillion dollars every year. Its expenditures can be divided into two broad categories. The first category is goods and services. This is a category most people understand because most people engage in this behavior too, although what they buy can be very different.

Some people suggest that the government should not borrow money because it can simply print more. It is important to keep in mind, however, that money has value because it is limited in quantity. Printing more money decreases the value of the currency and can also lead to rapid inflation

The following chart shows the times of budget surpluses and deficits between 1966 and 2015. (Chart (Graph L18 A4))

What is fiscal policy?

The government affecting the economy through tax policies and federal spending

Currently, the United States has a common currency with multiple denominations. It issues both coins and paper currency, and the amount of that currency is managed by a central bank called the Federal Reserve.

The history of money and banking in the United States is a long and complicated one that continues to cause debates today.

A financial system is a system that allows money to pass between lenders, investors, and borrowers. The chart provides a snapshot of how this system works. People who have surplus money, called savings (v) , deposit that money with a financial intermediary

The intermediary can loan that money to others, perhaps a business or government entity. In return for the use of the money, those borrowers pay dividends and interest, which creates more surplus funds that can be loaned out to others. This is a circular flow of activity that perpetuates itself

Flowering Riches

There have been many forms of currency throughout human history. In Holland during the 1600s, tulip bulbs were very valuable. So valuable, in fact, they were sometimes used as money. Try to image a tulip bulb, the seed of a tulip, being worth 4,000 gold pieces. It is difficult to understand.

However, a saver can also purchase something called a certificate of deposit (CD), which is a savings account that holds a specific amount of money for a fixed period of time. Because this provides a degree of certainty for the bank, it will offer higher interest rates as an incentive. This is demonstrated with the interest rates table that follows. (Chart (Graph L20 A1))

The longer a person promises to keep money in the bank, the higher the incentive offered by the bank. This is still a very low-risk investment, so the return offered on CDs is usually not very high. A person who purchases a CD and needs to cash it out before the agreed time period will have to pay the bank penalty fees.

When considering US government expenditures, it is important to first consider where it generates its revenue.

The majority of the federal government's revenue comes from the income tax, which generated $1.5 trillion in 2015 out of a $3.2 trillion budget. It also generates income through corporate income tax ($344 billion), social insurance taxes ($1.1 trillion), and excise and other taxes ($299 billion).

How do unfunded mandates impact state spending?

The mandates force states to spend money in ways they did not anticipate

Paper currency and bills serve specific functions, the first of which is as a medium of exchange. This means it is the tool that allows a transaction to take place. Think back to the sandwich shop where the cashier sold you a sandwich. You did not offer to sweep the floors or wash dishes for a sandwich. The cashier did not just give it to you. The exchange took place because you had money to give to the cashier.

The next function of money is to act as a measure of value. This means the price attached to a product gives you an idea of how much it is worth. In this way, money provides the same use as a ruler or a scale. A scale measures weight, and if someone tells you a product weighs 100 pounds, you have a good idea about what that means. Just as a scale measures weight, money measures value. If you walk into a store and see a price tag on a basketball for $20, you are fairly certain that that basketball has an approximate value of $20. Whether that basketball is worth $20 to you is a different economic issue.

In 2015, discretionary spending made up $1.2 trillion of the $3.7 trillion federal budget. While this money is spent at the discretion of Congress and can be cut, it is also a smaller portion of the budget. About half of discretionary spending, nearly $600 billion, was used for defense spending. This money was used to pay for the defense of the United States, US involvement in Iraq and Afghanistan, and other defense against terrorist activities.

The other half of discretionary spending is categorized as non-defense spending, and it includes a wide variety of programs such as health programs (other than Medicare and Medicaid), transportation, education, and veterans' benefits that are not mandatory. One program, known as Temporary Assistance for Needy Families (TANF), provides assistance to needy families.

This is the process of removing some laws to make it easier to do business and to allow the free market to operate. In the 1980s, for example, two major pieces of legislation actually decreased the laws governing deposit institutions. One was the Depository Institutions Deregulation and Monetary Control Act of 1980, which began the process of eliminating limits on interest rates payable on deposit accounts.

The other was the Garn-St. Germain Depository Institutions Act of 1982, which sought to make it easier for people to get home loans. While the intent of deregulation is to make it easier to do business, it may also make it easier for businesses to engage in risky practices. These risky practices can, in turn, lead to crises that have very high costs.

No matter the type of stock, people buy them with the expectation that they will receive a positive return on their investment. They receive this return in one of two ways. The first way is if the company pays dividends. These are the share of profits owed to each shareholder.

The other way is if the company stock increases in value from the time you purchase it until the time you sell it. For example, if you buy 50 shares of stock for $10 each in July and then sell your shares for $15 each in August, your profit will be $250 minus any fees related to buying and selling the stock.

The first system used to exchange goods and services was called a barter system. In this type of system, people traded goods and services for mutual advantage. For example, Isaac might keep chickens on his farm and have more eggs than he needs. Sheri grows vegetables in her garden, and she also has more than she needs. Isaac can bring Sheri eggs, and Sheri can give Isaac vegetables. Both parties have benefited from the exchange

The problem with bartering is that Isaac has to find someone who has what he wants and who also needs eggs in return. The system is not convenient. In addition, if he cannot find someone to trade with quickly, his eggs will spoil, so the system is not durable. Bartering is still commonly used. If you ever traded part of your lunch with a friend who had something you wanted, then you have bartered. However, this system is no longer the main method for the exchange of goods and services.

Another problem is that the federal government uses a huge share of the money that is available to borrow within the American economy. If the federal government is borrowing billions of dollars every year, this can lead to higher interest rates and will have the effect of crowding out other private investors who do not want to pay those higher rates. The federal government can also drive up prices for other goods and services and crowd private investors out of those areas as well. This can slow economic growth.

The reasons for the current US national debt are both simple and complicated. The cause of the debt is very simple: the federal government is spending more money than it generates in revenue.

Beyond the principles of the tax system, there is the practical matter of what taxes people pay and how those taxes are collected. Two types of income taxes exist. The first is the individual income tax, which is a tax levied on the wages, salaries, and other income of individuals.

The second is a corporate income tax, which is a tax on corporate profits. The individual income tax is a much larger source of revenue for the federal government than the corporate income tax.

The United States economy can be divided into two sectors. The first is the private sector, which is the part of the economy made up of private individuals and businesses.

The second is the public sector, which is the part of the economy that is made up of local, state, and federal governments.

So what do economists disagree about? One area is related to the two principles of taxation. The first principle is the ability-to-pay principle of taxation. This is the belief that individuals should pay taxes according to their levels of income, regardless of whether they benefit personally from the tax.

The second principle is the benefit principle of taxation. According to this principle, the people who receive the benefit should pay the tax regardless of their income. Arguments for and against each are shown in the table below.

Adding to the complexity are various tax classifications, each affecting the economy differently. The first is known as a progressive tax, or one where the percentage of taxes a person pays rises as that person's income rises. Because this places the tax burden on the people with the highest incomes, it falls under the ability-to-pay principle of taxation.

The second type of tax is a regressive tax, or one where the percentage of taxes a person pays drops as that person's income rises. Generally, a system is not planned to be regressive; however, when the benefit principle is applied, a tax could become regressive.

Some state expenditures are mandated by the federal government. However, the federal government does not support these requirements financially. These are referred to as unfunded mandates. An example would be the Americans with Disabilities Act, which requires that public facilities be made accessible to people with disabilities. This is an important thing to do, but it is also an additional expense that the states need to cover.

The states also spend a significant portion of their budgets on public education. At the state level, these expenditures would be significant at both the higher education level and at the elementary and secondary education levels. One final category of spending that can be very large for states is transportation. But this can be very different, depending on state needs. Other state expenses include things like state policing agencies, hospitals, state parks, and correctional facilities.

A second category of expenditure is called transfer payments. These are payments made by the US government for which it does not receive goods or services. For example, Social Security payments made to individuals who have reached retirement age, or who are receiving those benefits for another reason, are considered transfer payments. Other types of transfer payments are made to individuals with disabilities and to those who are unemployed.

There are also transfer payments made from the federal government to the state governments. These payments, called grants-in-aid, are transfer payments from one level of government to another and do not involve any compensation. They can be used for many different purposes, from education to disease prevention.

Beyond the income tax, in 2011 $819 billion came from the payroll tax. There are taxes listed under "Other" as well. One is the customs duty which is a tax on imported products. Another is the estate tax, which is sometimes called a death tax, because it is the tax on the transfer of property when a person dies.

There is also the excise tax, which is a tax on the manufacture or sale of selected items. Finally, the corporate income tax, which is an income tax businesses pay, makes up a very small percent of the revenue, but at $181 billion it is still a significant amount of money.

If the economy grows too quickly, this can lead to harmful inflation where prices rise too quickly for people to manage. Contractionary fiscal policies include raising taxes and decreasing government spending.

These are the opposite of expansionary policies, and as a result, they have the opposite effect. They slow demand by taking money out of circulation.

When these companies make loans, they take an application from an individual or business and consider the borrower's creditworthiness and ability to pay. They also ask the borrower to pledge assets as security, or collateral.

These assets could be a home, in the case of a second mortgage, or securities such as stocks and bonds. The purpose of the collateral is to ensure the finance company can recoup some of its losses in the event the borrower is unable to repay the loan.

The history of banking in the United States is complex. It includes the evolution of a central bank that is managed by a government agency and the evolution of banks with charters from both the federal and state governments.

These two components of banking developed in tandem over the course of US history.

These types of policies have what is called a death benefit (c) that is paid to beneficiaries when the policyholder dies. Beneficiaries are usually close family members, such as children or spouses, because the policy provides protection against loss of income when a person dies.

These types of policies are also investments that accumulate cash value over the life of the policy. If you borrow money from this policy, you are borrowing from the accumulated cash, not from the death benefit. You do have to pay it back, but there is not an application process since it is your money. Another type of life insurance is called term life, but these policies cannot be used in the same manner.

For the financial system to work, there has to be a way for people to store their money. There also has to be a way for the best possible applicants to access that money. This is why financial intermediaries are essential. They have the capacity to store money safely and offer incentives to people to save their money.

They also likely offer better incentives for longer storage. For example, a depositor can store their money in a savings account, but the interest offered is usually very low because a consumer can withdraw that money, and even close that account, at any time without warning

How are payroll taxes used?

They are used for entitlement programs like Social Security

Eventually, groups of people developed various types of money that were easy to carry, would last for a long time, and were accepted by others as valuable. Cowrie shells were the earliest form of money, and they were used by many different people. These shells were convenient to carry around, and they were durable—in other words, they wouldn't spoil.

They became widely accepted, which made them useful as a medium of exchange. Various other items were also used as currency over the years. These included leather money made from deer hides and wampum (strings of beads). These early forms of money solved many of the problems inherent in a barter system, but one problem remained. These forms of money were plentiful and easy to duplicate, so it was difficult to ensure that they would hold their value.

Life insurance companies take in money through the premiums people pay, but they do not hold it for long, because they use that money to generate additional money. They are likely to invest the money they receive in relatively safe investments such as bonds.

They do this to ensure they are always in a position to pay people's death benefits. Life insurance companies may use their surplus cash to make loans. As for-profit institutions, they must be careful doing this because they will likely want to keep their risk as low as possible

Each bond is given a rating. The lower the rating, the higher the risk. Bonds can be investment-grade, which means there is less risk to the buyer. They can also be high yield, which means there is more risk to the buyer. Junk bonds are bonds that are low-grade, high-yield bonds.

They offer a much higher return than traditional bonds, but that is because they are much riskier. The safest bond options tend to be government bonds, like treasury bills, which are short-term government securities. Another safe option are savings bonds, which are a low-risk savings product that helps protect people's money against inflation.

If you look at the $100 bill (Chart (Graph L19 A1)) , you can note a few features. The first is that it is actually called a Federal Reserve Note. Our currency is not commodity money, which is money whose value is tied to a specific commodity like gold. Its value comes from its backing by the United States government. It also has a variety of features designed to make it difficult to counterfeit

This helps to ensure the money retains its value. This note is kept in limited supply by the Federal Reserve, is durable because it is made of fibers like linen, is portable because it can be carried in a wallet or a pocket, and can be divided into smaller bills like $20, $10, $5, and $1.

In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act, which was meant to bring the S&L crisis to a close and ensure the problems were not repeated. It created stricter standards, increased the penalties for breaking the law, and transferred oversight of these institutions to the Office of Thrift Supervision.

This included the Resolution Trust Corporation, which was in charge of selling off the assets of S&Ls that had become insolvent. It also transferred the responsibility for insurance coverage to the FDIC.

How do I feel about risk?

This is a very important consideration because you do not want your investments to cause you anxiety. The stock market can be very volatile, with wild swings. This suits some people, but not everyone. One way people help manage the risk is to diversify their portfolio. This means putting money into a variety of options so that if one area goes bad, the other investments are safe

One thing that all levels of government share is their reliance on taxes as a major source of revenue, but what they tax is not identical. The federal government raises the majority of its money through income taxes. These taxes are generally withheld from people's paychecks. Included in the federal government's withholdings is a payroll tax.

This tax on wages and salaries finances Social Security and Medicare. The other taxes withheld from wages and salaries pay for other government services, the largest of which is the military. The sources of federal revenue are illustrated in the graphic from the Congressional Budget Office.

Sales taxes may be used to do more than simply provide revenue. Sometimes sales taxes are used to discourage some behaviors. When this happens, the tax is often referred to as a sin tax.

This tax would be much higher than other sales taxes in the area, and that increased price would discourage people from continuing to purchase the product or purchasing the same amount of the product. Tobacco, for example, often has a sin tax placed upon it. A state could put a sin tax on a pack of cigarettes, and the federal government could add an additional excise tax on top of that.

Sales taxes may also vary depending on whether an item is considered a luxury good, or a good for which demand increases faster than income when income rises. In other words, it is an item that is easier to buy when a person is wealthy. There may be a special sales tax just for these items called a luxury tax.

This type of tax tends to impact only wealthier individuals because they purchase items that the average consumer cannot afford. For example, a yacht, which is a very expensive boat, may be subject to a luxury tax. However, these days, the term luxury tax is sometimes used in reference to the same items that are covered by sin tax or excise tax.

If education spending was increased as part of a stimulus, that spending is likely to be popular with many voters.

Those same voters might be angry with a member of Congress who decides to cut that spending when it is no longer needed to stimulate growth. As a result, that member of Congress may lose his or her position in the next election.

What is one argument in favor of the benefit principle of taxation?

Those who receive the service pay for it

At a public university, the average cost per year is about $15,000, which is less than half the cost of the average private school, at about $39,000 per year, according to the National Center for Education Statistics.

Thus, the relationship between the public and private sectors includes both competition and balance. This provides certain benefits to consumers.

Stock is purchased on a stock exchange, also called a stock market. This is a market where securities are bought and sold, and companies can choose which stock exchange they use to sell their stocks. There are many different stock exchanges in the world.

Today, however, like so many other products in the world, stocks can also be purchased online. Still, most people rely on a stockbroker to handle their transactions.

Because of these negatives, future tax reforms are inevitable as the American government tries to improve the equity, simplicity, and efficiency of its tax system.

Two possible solutions are a value-added tax, commonly referred to as a VAT, and a flat tax. The advantages and disadvantages of these two solutions deserve careful consideration.

Dispute over Social Welfare

Two primary opposing viewpoints exist concerning social welfare. One side believes it is the primary responsibility of the government/society to provide social welfare. The other side believes it is up to individuals and private groups to assist those in need and that the government has no place in social welfare issues.

Mutual Funds (z)

US government securities, stocks, or bonds purchased as a group through investment firms, banks, etc.

A safe and secure system for banking is a vital part of any economy. Banking institutions provide a safe place for people to store their money, and they offer a variety of loans that allow businesses and individuals to grow financially. This is a driving force in economic growth.

Unfortunately, banking in the United States has not always been safe and secure. Periods of banking crisis have occurred, which were followed by federal government reforms designed to provide security.

Excise Tax (V)

a per-unit tax on the sale of a particular good

History of Welfare

Welfare has been a part of the majority of civilizations throughout human history. It was originally understood primarily as a social and religious responsibility. Otto von Bismarck initiated the first modern welfare system as chancellor of Germany. Zakat (charity) is one of the Five Pillars of Islam.

Characteristic: Divisibility

What It Means: can be broken down into smaller units Why It Matters: Not everything costs the same amount, so people need change in return for purchases. Gold is difficult to divide into smaller units; it requires tools and weighing.

Characteristic: Durability

What It Means: can withstand long-term use and not be easily damaged or destroyed Why It Matters: If it is ruined, then people cannot continue to use it for payment. Shells would break, and then others would not accept them.

Characteristic: Portability

What It Means: easy to carry around, likely to be light and small Why It Matters: People need to be able to carry money around. One early form of money was cattle—not easy to carry around.

Characteristic: Limited Availability

What It Means: not readily available or easy to duplicate Why It Matters: Money gets its value from its limited availability. Rocks are durable and portable, but would you accept them as payment? Probably not—they do not have value because they are widely available.

When a government is determining where and how to tax citizens to raise revenue, it has to consider a number of things. Should everyone have an equal burden? Should the tax be paid solely by the group receiving the benefit?

What is the best way to collect the taxes? There are many possible answers to these questions, and not all economists agree on the answers. This is why any changes to the tax system are hotly debated and usually involve some controversy

You've probably heard before that saving money is important. Among other things, it's important for emergencies, college tuition, and the future.

What people don't often discuss is why saving is important for the economy as a whole. The willingness and ability to save are vital factors in economic growth for the entire economy.

Bear market (v)

a period in which falling prices encourage investors to sell their securities rather than risk losing more money

Bull market (v)

a period in which rising prices encourage both buying and investor confidence

When it became clear that action was necessary, Hoover took steps such as supporting local aid for public works and creating some government agencies. However, he did not want to provide any direct support. Hoover was concerned about moving the country in the direction of socialism, and he did not want to begin deficit spending.

When Roosevelt introduced his New Deal to America, people were eager for help. Roosevelt, whose ideas were based on the economic theories of John Maynard Keynes, was willing to deficit spend to stimulate a weak economy. Roosevelt introduced banking reform, emergency relief programs, and work relief programs.

On the plus side, a VAT is much easier to collect because it is built into the product's price. It is also neutral because people can choose to buy or not buy the product. One negative element of the VAT is that this type of tax is difficult to see, so it is not transparent.

When a tax is not transparent, it is harder to monitor. A VAT is also a tax on consumption, and, depending on how it is implemented, it may become a heavy burden for individuals with less wealth and income.

It is common for people to make investments with their money. The reason they do this is because they are hoping for a return on that investment.

When an investment is good, the return is a profit. When the investment is not good, the return is a loss. Many reasons explain why people invest, and there are many investment options.

One particularly severe banking crisis involved savings and loan associations. Commonly referred to as "S&Ls" or "thrifts," these types of institutions accept deposits and make loans to consumers much like a bank, but their primary lending focus is on real estate loans.

When deregulation made it easier to make home loans, some of these organizations began to engage in these risky practices. As a result, in the 1980s and early 1990s, about one-third of these institutions failed and people moved their deposits to banks. This became known as the Savings and Loan Crisis. The final cost to taxpayers who had to cover the deposit insurance was more than $100 billion.

The table demonstrates the difference between deficit and debt. A deficit is the difference between what is made and what is spent. The debt is the money owed as a result of those actions. Even though John's income and expenses were equal in 2014 (for a deficit of $0), he still had debt.

When it comes to debt, the problem is more complicated than the table indicates. The table does, however, clarify the difference between two commonly confused terms. When the federal government engages in deficit spending, the same consequences apply: the debt grows. The difference is that the dollar amounts are much larger.

The government might also choose to increase its spending to stimulate demand. For example, it may increase military or education programs. This would directly increase demand because the government would be acting as a consumer.

When the economy is growing, the government could decide to use contractionary fiscal policy. This would require taking money out of circulation to decrease aggregate demand. While it may seem like a bad idea to slow a growing economy, remember that the goal is steadily rising growth.

Discretionary spending, on the other hand, is spending for federal programs that must be approved every year. Over the years, the percentage of the budget that is mandatory has been increasing, while the percent that is discretionary (optional) has been decreasing. This is described in detail in the president's budget request. Examples of discretionary spending include funds spent on the military, education, the environment, and transportation.

When the federal budget needs to be cut, the cuts must come from discretionary spending. Since that accounts for a smaller and smaller part of the federal budget, cutting the budget becomes increasingly difficult.

These scenarios are simplifications, but they illustrate the point that budgets can be overspent for reasons that include both less income than expected and more spending than expected. Remember, the spending can be either mandatory or discretionary. If it is mandatory spending, the government cannot cut it.

When we look more closely at mandatory spending, it is clear that it makes up the largest percent of the federal budget. However, it is spending that is required by law, so it cannot be cut to decrease the deficit. In 2015, the total budget was $3.7 trillion, and mandatory spending was $2.3 trillion of that budget. Of that $2.3 trillion, $774 billion was paid in Social Security benefits. Together with Medicare and Medicaid, these safety net programs make up the vast majority of the mandatory spending.

Another way that governments can spend the tax money they collect is by redistributing wealth to address areas of need. When the government takes the money it collected from one group to provide assistance to another group, the wealth has been moved from one group to another.

When wealth is used to help a large group of people (for example, military spending), people may be more supportive than when it is used to help a small group of people (for example, Temporary Assistance to Needy Families). In some ways, with the debt as large as it is, all government spending is controversial. However, some types of spending are more concerning than others.

How much money do I need?

When you need a smaller amount of money, you need less time to reach your financial goal, and the low-risk, low-return options may be the best choice.

Bonds are another type of security. A bond does not represent ownership. Instead, it represents debt. A bond can be issued by a company or a government and is issued at a fixed interest rate for a specific period of time. Although people often refer to stocks and bonds as if they are the same, they represent two very different types of investment.

When you purchase a stock, you become a shareholder who either owns common stock or preferred stock. Both of these are securities that represent an equity asset. The difference between them is related to risk and reward. There is less risk of losing your money when you own preferred stock because these stockholders are paid first, even if a company goes out of business.

Today, individuals can not only download their tax forms via the Internet, they can also submit their completed tax returns electronically as well as pay any outstanding taxes online. Regardless, citizens are required to file their income tax returns by April 15 of each calendar year.

While these advances are a boon to both American citizens and the IRS, some fundamentals about the office have never changed. The offices of both the commissioner of the IRS and the chief legal counsel are appointed by the president of the United States. This means that the individuals selected to fill these positions must be approved by the US Congress before taking office

Another securities option is the bonds that were mentioned earlier. These can be purchased directly from the government or through a broker. People purchase bonds because they are more secure than stocks. Of course, the lower risk generally means a lower return will be offered. There are many different types of bonds.

While you own the bond, you own the debt of the government, municipality, or corporation that issued it. In return for borrowing your money, the bond issuer agrees to pay you a set amount of interest. Eventually the bond matures, or comes due. When that happens, the life of the bond is over.

Fiscal Year (V)

a period of time used by a company or government to denote the beginning and end dates of business activity

discretionary fiscal policy (v)

a policy developed by the government in the event of an economic crisis

When you walk into the store to buy a sandwich for $4.95, you may hand the cashier $20. In return, the cashier gives you $15.05 and a sandwich.

You have just exchanged money for a product, and both parties feel as though they have benefited from the transaction. Money, which is a medium of exchange, has been used for many years. However, that was not always the case. Even when money was first developed, it was not the paper bills and coins we use today.

Appropriations bill (V)

a bill approved by both houses of congress that allocates spending money to government departments, agencies, and programs

certificate of deposit (v)

a certificate issued by a bank that guarantees a fixed rate of interest for up to five years

Income Tax (V)

a charge imposed by the government on the money earned or gained by individuals, companies, and other taxable entities

Gross domestic product (GDP)

a common indicator of an economy's health based on the total value of goods and services produced during a fiscal year

finance company (v)

a company whose primary service is providing consumer loans with high interest rates

Which government tax policy is most likely to result in an increase in consumer demand?

a decrease in personal income tax

nonbank financial intermediary (v)

a finance company that facilitates the movement of finances but does not provide the services of a bank

contractionary fiscal policy (v)

a fiscal policy that decreases money in circulation to slow the economy

expansionary policy (v)

a fiscal policy that increases money in circulation to stimulate the economy

Tax Return (v)

a form used to file income taxes that allows governments to calculate an individual or business's taxes owed

Measure of value (V)

a function of money in which it is used as the standard by which prices are determined

subsidy (v)

a government benefit given out in order to increase public availability of a good or service

Sales tax (V)

a government tax on goods or services at the moment of sale

Read the scenario. The federal government operates military bases in many states. Luke Air Force Base is located in Glendale, Arizona, but the federal government is considering moving the base to New Mexico. What problem will Glendale face if Luke Air Force Base is closed?

a loss of revenue

Stock exchange (v)

a market in which shares of public companies are traded

Stock Market (v)

a marketplace where securities are sold

barter system (v)

a means of trade where two people with items of similar value swap them with one another

Currency (v)

a monetary system or medium of exchange

credit union (v)

a nonprofit, member-owned financial cooperative

Transfer Payment

a one-way transaction in which an individual receives money from the federal government

Certificates of Deposit (z) (CDs)

bank notes that promise payment of a fixed interest rate on maturity

Which noteworthy legislation limited how much banks could earn from investments, such as the selling of securities, and also established the Federal Deposit Insurance Corporation (FDIC)?

banking Act of 1933

What is best defined as a "contract in which an individual loans money to a corporation and earns interest on a fixed schedule in return"?

bond

Risk (v)

chance that an investment will result in a loss

Bond (v)

contract in which an individual loans money to a corporation or government and earns interest on a fixed schedule in return

Which financial institutions typically have membership requirements, such as belonging to the military?

credit unions

Fiat Money (v)

currency that only has value because the government has declared it legal tender

Commodity money (v)

currency, like gold, silver, livestock, or grains, that has intrinsic value

Greenback (v)

demand note (paper money) printed and offered by the federal government during the Civil War

financial assets (v)

deposits and securities, such as stocks and bonds

Read the sentence. The dollar can be broken down into cents. What characteristic is the dollar displaying in this example?

divisible

What is a significant expense for states but not for the federal government?

education

The three characteristics of an effective tax system:

efficiency, equity, and simplicity

Barter (v)

exchanging one set of goods for another

Medicare

federally subsidized healthcare that individuals receiving social security are eligible to use

Medicare (v)

federally subsidized healthcare that individuals receiving social security are eligible to use

Social Security (v)

federally subsidized plan for retirement and disability that all working citizens pay into and are eligible to collect from at a certain age

Securities (v)

financial instruments that represent some type of value

securities (v)

financial instruments that represent some type of value

What is money created by government decree?

flat money

Which items are primary areas of assistance for social welfare?

food, housing, and medical care

Store of value (v)

function of items that can be saved and used later with predictable value

Saving and loan association (v)

institution that accepts deposits with the intent to loan those deposits primarily for real estate development

Financial Intermediaries (v)

institutions that facilitate the circular flow of financial activity; they are banks, savings and loans, and credit unions

Compounded interest (v)

interest paid on principal and accumulated interest

The Federal Reserve

is a decentralized central bank because while it is not under government control, it is accountable to both the government and the public.

When spending is mandatory,

it has been set up by law, and Congress is required to spend the money as outlined in the law. This mandatory spending is often on entitlement programs, which guarantee financial benefits to a specific group of people. These include Social Security, veterans' benefits, and Medicare. Some people include interest payments on the national debt as a portion of mandatory spending, but the federal government usually treats it as its own separate category.

Federal spending is commonly divided into two categories:

mandatory spending and discretionary spending

Within the budget, there are two types of spending:

mandatory spending and discretionary spending

What are the largest categories of discretionary and mandatory spending?

national defense and Social Security

Alphabet agency (v)

nickname given to New Deal agencies and programs set up by Roosevelt's administration during the Great Depression

Which advantage of a value-added tax is most likely to win Americans' acceptance?

not: Many more deductions are available

The Banking Act (v)

of 1863 established national charter banks and a national currency. (Chart (Graph L19 A2))

the Gold Standard Act (v)

of 1900 tied US currency to a specific value of gold.

Discretionary spending (v)

optional government spending on nonessential programs, goods, and services

discretionary spending (v)

optional government spending on nonessential programs, goods, and services

Read the sentence. The US government issued greenbacks during the Civil War. What were greenbacks?

paper money printed with green ink on the reverse side

Quarterly tax payments (V)

payments made quarterly (every three months) to the government for income taxes

Read the definition. a regular payment dispersed to an individual during retirement from an investment fund to which an individual or employer has contributed Which is being defined?

pension

What type of spending includes line items on a federal budget that have bypassed normal processes and are used to benefit a small group of people or businesses?

pork barrel spending

As money evolved, it became clear that it needed four characteristics in order to be useful:

portability, durability, divisibility, and limited availability

Payroll withholdings (v)

portions held back from an individual's paycheck and used to pay federal and state income taxes

Separation of Powers (v)

refers to the doctrine followed in the United States and several other nations that divides the legislative, executive, and judicial functions of government into separate and independent bodies.

Mandatory (v)

required by laws or rules

Balanced Budget (v)

revenue is equal to expenses; there is no deficit or surplus

Money Market Accounts (z)

savings accounts at banks that require a high minimum balance

Public Sector (v)

section of the economy made up of government owned businesses and enterprises

Great Depression (v)

severe recession that started with the stock market crash in 1929

Which criteria for effective taxes is violated by confusing instructions?

simplicity

Collateral (v)

something of value that a lender can sell if the borrower defaults on a loan

Once people retire, the fund disperses the money to those who paid into the fund. Unlike a whole life insurance plan, pension plans do not allow the pensioner to borrow against the funds in the pension. Once the funds are dispersed, though, there are loans called pension advance loans (v). However, these tend to go against the best interests of the borrower.

sometimes pension funds do not perform well and go broke. When this happens, the people who put their money into the pension fund can lose their money. Fortunately, some pensions are insured by the government through the Pension Benefit Guaranty Corporation (PBGC). The PBGC also covers cash-balance plans. However, it does not cover other retirement funds, such as 401(k), government pensions, and military pensions, among others.

Preferred Stock (v)

stock that carries less risk and has less potential for reward

common stock

stock that carries more risk but has a greater potential for reward

If Jim hides $30 under his mattress and he still has $30 there three weeks later, what function has the money fulfilled?

store of value

Proportional tax (V)

tax rate in which all tax payers are charged the same percentage of their income

Tax loophole (V)

technicality in the tax code that allows people to reduce their tax liability

Per Capita (v)

term used for statistical purposes to refer to data by individual; Latin, literally meaning "by heads"

Pork barrel spending (v)

the adding of a line item to a bill to direct spending to a congressperson's own district

Premium (v)

the amount consumers pay for insurance

What is the definition of risk?

the possibility of losing value on an investment

capital gains (v)

the profit earned on a sold property or investment

What is the definition of return?

the profit or loss accumulated from an investment

Private sector (V)

the section of the economy made of up of non-government owned businesses

insolvent (v)

the state of being unable to pay debts

Once the federal budget is set, how is money allocated?

through the appropriations committees

What is the primary role of a financial intermediary?

to channel funds between savers and borrowers

Counterfeit (v)

to imitate fraudulently

What is the purpose of an expansionary fiscal policy?

to increase the level of aggregate demand to grow the economy

Why is it important for a tax to be efficient?

to promote reasonable revenue

Revenue (V)

total income generated before subtracting expenses; also known as gross income

Crowding out (v)

when government actions push private entities out of the market, either as demanders of loans or purchasers of goods and services

Spending can also be discretionary

which means that money is allocated and spent based on decisions made by the current Congress each fiscal year. The largest item in discretionary spending is military and defense spending, which was at more than $550 billion in 2015. Discretionary spending also includes transportation, national parks, education, and space programs, among other areas.

In what key area does the benefit principle of taxation and the ability-to-pay principle of taxation differ?

who should pay taxes

charter (v)

written instrument to grant rights or create an organization; official agreement defining basic laws or principles for a group (such as a constitution)