Pre-test reviewPre-test review

Chapter 18Chapter 18

1. What was the total national debt at of 2008?2. What is that debt today?3. What are low-income people tend to be most

concerned about?4. How do low-income people tend to vote?5. What are high-income people tend to be most

concerned about?6. How do high-income people tend to vote?7. When voting behavior and economic

conditions correlate at the national, but not individual level, what type of voting does that represent?

8. Which economic theory is characterized by the combination of monetarism, tax cuts, and domestic budget-cutting?

9. What was Reagan able to accomplish by lowering taxes and increasing spending?

10. Budget deficit and ______________ were some of the consequences of Reaganomics.

11. Which executive agency is in charge of economic forecasting and preparing the president’s annual economic report to Congress?

12.Which executive officer provides estimates of government revenues and who recommends tax changes?

13. Which businesses tend to support free trade? Which businesses tend to support trade regulations?

14. Which of the following would the American public not support: a balanced federal budget, lowered government spending, tight trade restrictions

15. What fraction of the federal budget do entitlement programs represent?

16. What are entitlement programs?17. What is a part of the discretionary budget?

Economic Theories and Political Needs:Economic Theories and Political Needs:• Economic policy is directly related to understanding of

the impact of tax laws on the American public sector

• MonetarismMonetarism – based on the theory of Milton Friedman • Monetarism suggests that predictable increase in the

money supply at a rate equal to the growth of economic productivity is the answer to a healthy national economy.

• Monetarism implies that inflation occurs when there is too much money chasing too few goods, or too much money is printed. Rampant inflation forces government to cut back sharply, which leads to continuous imbalance. This leads to economic recession, increased unemployment.

Economic Theories and Political Needs:Economic Theories and Political Needs:

• KeynesianismKeynesianism – theory based on John Maynard Keynes, states that economic health depends on what fraction of people’s income is saved or spent.

• Low spending leads to economic decline in productivity, which high spending leads to economic debt

• Keynesianism suggests that the key is to create the right level of demand, without generating disproportionate level of debt

• When demand is low the government should pump more money into the economy by spending more and generating public-works programs

• When demand is high government should cut back on its spending

Economic Planning:Economic Planning:• Economic PlanningEconomic Planning – price and wage control

• John Kenneth Galbraith and other economics believe that government should regulate the maximum prices that can be charged and wages that can be paid, so that neither corporations nor labor force can have the power to influence economic conditions to a large extent

• The theory of economic planning implies that through price and wage control and through control over direction of investments government can improve the economy

Supply-side Tax CutsSupply-side Tax Cuts

• Belief that lower taxes and fewer regulations will stimulate the economy

• This view is supported by economics such as Arthur Laffer and Paul Craig Roberts

• Less government interference, sharp cuts in taxes will motivate people to work, save, and invest greater investments will lead to more jobs and higher productivity; fewer people will look for tax loopholes and cheat on tax returns

• Greater total national income will compensate for lower tax rates

Reaganomics: Reaganomics: refers to the changes in federal economic policies set during Reagan’s presidency

• These changes were based on several theories: monetarism, supply-side tax cuts, and domestic budget cuts

• Lowering taxes, while increasing government spending =

Drop in unemployment rate and a rise in business activity, while also generating a large deficit

Economic Policy Making:Economic Policy Making:

• Decisions about economic matters is made with the direct assistance of the Chairman of the Council of Economic Advisers, the Director of the Office of Management and Budget, and the secretary of treasury

• CongressCongress – sets the fiscal policy, approves all taxes and almost all expenditures, and consents on wage/price controls

• FedFed – Federal Reserve System

– Seven members are appointed by president for 14 yr nonrenewable term

– Fed sets the monetary policy in the attempts of controlling the amount of money and bank deposits and the interest rates charged

* No president can implement an economic theory without the assistance of Fed and Congress

Responses of HW questions:Responses of HW questions:1. $8 trillion2. Sociotropic voter considers the economic health of the nation as a whole

when voting3. The massive system of CW pensions for Union army veterans and the

Social Security system are examples of how the government has used money to affect elections

4. Democrats tend to be more worried than republicans about unemployment

5. Lower taxes, less debt, and spending on new government programs produce majoritarian politics

6. Politicians have strong tendency to get reelected by spending money of specific programs that are popular

7. Milton Friedman’s economic philosophy is called monetarism8. Friedman takes the position that inflation is cased when there is too

much money chasing too few goods9. Keynesians believe that when people save too much demand will

decrease and production will decrease10. A key element of the supply-side theory of the economy is the

importance of incentives

Responses of HW questions:Responses of HW questions:1. F

2. F

3. T

4. F

5. F

6. T

7. T

8. T

9. T

10. F

Important Terms:Important Terms:1. Budget – a document that announces how much the

government will collect in taxes and spend in revenues and how those expenditures will be allocated

2. Discretionary spending – spending not required to pay for contract, interest on the national debt or entitlement programs

3. Entitlements – mandatory government spending on items such as Social Security, Medicare, Food Stamps, etc.

4. Price and wage control – government regulation of the maximum prices that can be charged and wages that can be paid

5. Self-regarding voter theory – the theory that voters are mostly influenced by their own immediate economic situation

6. Sociotropic voting – electoral behavior that regards the condition of the national economy more so than one’s own personal finances

GAAP - generally accepted accounting principles

According to the Institute, this is the largest such decrease since at least 1962 (the Institute compiled historical data from the Census Bureau Web site back until 1962).

1. "After adjusting for inflation, legislative changes, and known anomalies", tax revenues were lower in 47 of the 50 states.2. Personal income tax revenues were down 17.5% from the year before.3. State tax revenues fell to levels "last seen in 2005".4. Corporate income tax revenues were down 18.8%.5. Economic activity is declining in 49 of the 50 states (North Dakota is the lone exception).6. Alaska experienced a 72% drop in tax revenues from Q1 2008 (due in large part to the drop in oil prices). California saw a 16.2% drop, while Michigan experienced a 16.5% drop.