AP US Gov Economics Notes

Economics

Taxation

Progressive (the more you make the more you pay) v. Regressive taxes (sales tax- everyone pays the same, so it takes a higher percentage on a poor person's salary) 

Flat tax- everyone pays the same percentage of their income

Should we raise taxes to deal with debt?

Democrats want to cut spending and raise taxes, but threpublicans just want to cut spending and not raise taxes

Biggest challenge to reducing the debt is entitlements

Main principle of economics is the principle of scarcity- we have unlimited wants but there are limited resources, so we have to make choices

There’s no such thing as free lunch

Keynesian v. Supply side economics

·      Keynesian (demand side)- If businesses and consumers aren’t spending, the government needs to spend to keep the economy going and make up the difference in GDP- get money in people’s pockets so they will spend.  Generally Democrats follow Keynesian.

·      Supply side- Cut taxes, especially on wealthy people/investors so they will spend more money/hire more people.  If business owners produce more, supply will go up and prices will go down.  Cut government spending, especially on social programs.  And deregulation to get the government off the backs of businesses.  Generally Republicans follow supply-side.

Entitlements

Mandatory spending that is about 60% of the budget.  There is not much room to cut on spending on entitlements

Federal reserve- how does it carry out monetary policy?

Monetary policy v. Fiscal policy

·      To maintain balance in the economy

·      Monetary is what the fed does by regulating money supply

·      Fiscal is what the national government does by taxing and spending

Recession and inflation

·      Recession- 

·      Inflation- too much money in circulation

o   Demand-pull inflation 

§  An increase in prices due to an increase in the money supply

§  “Too much money chasing too few goods”

§  Causes

·      Government spends a lot which increases the amount of money in circulation which increases inflation

·      Consumer spending habits- ex: during WWII people saved money, factories made weapons, and once the war ended people wanted to spend on appliances but the factories weren’t making them

o   Cost-push

§  Producer inputs go up

§  Causes

·      A key item goes up in value (example: oil) which causes everything else to go up

·      Workers get a raise and do not produce more, so the owner will raise prices (wage-price spiral)

FDIC- government agency that ensures all our deposits up to $250,000 per account

Methods of monetary policy

	Easy/loose (recession)	Tight (inflation)
Discount window/ rate- Interest rate that the Fed charges depository institutions (banks) for borrowing $	Lower the rate to increase lending so people will spend money	Raise the rate to make it harder to lend and lessen the amount of money in circulation
Reserve requirement- the percentage of a deposit that a bank must keep on hand.  The excess of the reserve can be lent out	Lower the requirement to allow banks to create more money to be lent out	Raise the requirement to lessen lending money and tighten the money supply
Open Market Operations- buying and selling of government securities (bonds)	Fed buys bonds from depository institutions so the depository institutions have more money to lend out	Fed sells bonds at a cheap price to depository institutions