The Federal Reserve and Fiscal Policy Monetary Policy
The Federal Reserve and Fiscal Policy Monetary Policy Defined: The actions that the Federal Reserve take to influence the money supply to achieve their stated macroeconomic goals of price stability and full employment. Ways the FED Influences the Money Supply: Increase / Decrease the Reserve Requirement Increase / Decrease the Discount Rate Buy or Sell U.S. securities (Treasury notes, bills, bonds) The Money Supply
Is a measure of the total amount of money in an economy The FED influences the money supply to achieve macroeconomic goals of: Price stability Full employment Economic growth The Money Supply and Money Supply and Interest Rates Interest Rates The FED influences the amount of lending and borrowing by using its tools to influence the money supply By influencing the money supply, the FED indirectly influences the interest rate Think of the interest rate being equivalent to the price of a good or service
Low interest rates= more borrowing (like low price= more buying) High interest rates= less borrowing (like high price= less buying) Interest rates reflect the interaction of lenders (who supply the funds) and borrowers (who demand the funds) Easy Money Monetary Policy Used when the FED wants to stimulate growth due to a contracting economy Effects/Consequences Increases the money supply, Which leads to lower interest rates Encouraging investment , spending,
and employment Tight Money Monetary Policy Used when the FED wants to slow growth due to a rapid expansion that may cause inflation Effects/Consequences Decreases the money supply, Which leads to higher interest rates Discouraging investment and spending Which can lead to lower employment How does the tax rate effect taxpayers? Proportional Regressive
Progressive Proportional Taxes Takes the same percentage or amount from both high and low income tax payers Examples: Michigan income tax - all are taxed on their income at the same percentage (4.35%) Social Security Taxes (up to the limit): Everyone (employer and employee each) pays 6.2% up to $106,800 Regressive Taxes Takes a larger share of income from low income taxpayers than from high income taxpayers Examples (consumption taxes): Sales tax- if an individual buys a new appliance
and pays $40 in sales tax, this $40 tax affect someone with a lower income more than one with a higher income (6.00%) Gasoline tax everyone pays the same percentage but it ends up taking a greater percentage of ones income from the lower income earners than higher income earners Progressive Taxes Takes a larger share of the income of highincome taxpayers than of low-income taxpayers. Higher income levels are taxed at higher rates Examples: Federal individual income tax - the higher the income, the higher the tax rate Brackets include 10% up to $8,375; 15% up to $34,000; 25% up to $82,400; 28% up to $171,850; 33% up to
$373,650, 35% beyond $373,650 (single rates) Corporate income tax rates Type of Tax Effect on $20,000 income Effect on $50,000 income Effect on $100,000 income
Proportional Tax: 4.35% Michigan Income Tax $870.00 paid in taxes $2,175.00 $4,350.00 paid in paid in taxes taxes Regressive Tax: 6% Michigan Sales Tax
You buy new furniture and have to pay $500 in tax. This takes 2.5% of your total Taxed 15% income You buy new furniture and have to pay $500 in tax. This takes 1% of your total Taxed
25% income You buy new furniture and have to pay $500 in tax. This takes 0.5% of your Taxed 28% total income $3,000 paid in taxes $12,500 paid in
taxes $28,000 paid in taxes Progressive Tax: Federal Income Tax
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