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Chapter Introduction

Section 1: Growth in the Size of Government

Section 2: The Functions of Government

Section 3: The Federal Budget and the National Debt

Section 4: Taxation

Visual Summary

Chapter Intro 1

All levels of government use tax revenue to provide essential goods and services.

Chapter Intro 2

How does the government impact your daily life? Highways and bridges, as well as the taxes you pay on gasoline, are just two examples of government involvement in your day-to-day activities. In this chapter, read to learn why the government collects taxes and what it spends those funds on.

Chapter Preview-End

Section 1-Main Idea

Section Preview

In this section, you will learn how the size and spending of government at all levels have increased over the last century.

A. A

B. B

C. C

Section 1-Polling Question

Can you name some other forces that affect the use of resource throughout the economy?

A. Many

B. Some

C. None

A B C

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Section 1

Government Growth

Government spending at all levels—federal, state, and local—has increased significantly over the years.

Section 1

Government Growth (cont.)

• Today, about 22 million people work for the government (federal, local, and state employees combined).

• During the late 1960s, the federal government paid for:

– National defense

– The salaries of members of Congress, federal judges, and the employees of executive departments

Section 1

Government Growth (cont.)

– Public-works projects

View: Government Purchases

• This continued until about 1970, whenfederal funds started diminishing.

A. A

B. B

C. C

D. D

E. E

Section 1

Government is involved in the following areas EXCEPT:

A. Transportation

B. Education

C. The Internet

D. Taxation

E. Worker Safety A B C D E

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Section 1

Why Has Government Grown?

The level of government spending reflects political decisions about how much goods and services should be provided by the public or private sectors.

Section 1

Why Has Government Grown? (cont.)

• One theory is that as the nation became richer, especially in the late 1960s and early 1970s, people demanded more government services to even out certain income inequities.

• Today, total government purchases easily exceed one-third of the GDP.

Section 1

Why Has Government Grown? (cont.)

• When the government taxes you to provide you with a particular service, such as Medicare, this cost of government is included in government spending.

– Government activity displaces private economic decision making involved in buying and selling.

• Government taxing and spending have opportunity costs.

A. A

B. B

C. C

Section 1

Do you think that the growth of the government has benefited or hurt society?

A. Benefited society

B. Hurt society

C. It depends on thesituation.

A B C

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Section 1-End

Section 2-Main Idea

Section Preview

In this section, you will learn about the responsibilities of government.

A. A

B. B

C. C

Section 2-Polling Question

Should the government make the decision of which goods are desired or undesired in our society?

A. Yes

B. Somewhat

C. Not at all

A B C

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Section 2

Providing Public Goods

Public goods are goods or services that many people can use at the same time.

Section 2

Providing Public Goods (cont.)

• Public goods are a special type of good or service that government supplies to its citizens.

• Usually, different levels of government share responsibility for public goods, such as the legal system.

Section 2

Providing Public Goods (cont.)

• Some goods in a society are considered to have special merit by government leaders.

– Museums and ballets are merit goods and may be subsidized by the government.

– Demerit goods are goods that government officials have deemed socially undesirable.

A. A

B. B

C. C

Section 2

Which of the following is a public good that only the government can provide?

A. Merit good

B. Demerit good

C. The court system

A B C

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Section 2

Promoting the General Welfare

Government can use its power to tax and spend to alter market outcomes.

Section 2

Promoting the General Welfare (cont.)

• Another function of the government is providing for the public well-being by assisting specific groups, such as the aged, ill, and poor.

• This is done through income redistribution.

Section 2

Promoting the General Welfare (cont.)

• Tax dollars are used to subsidize two general categories of assistance:

– Social-insurance programs

• Social Security, unemployment insurance, and workers’ compensation are examples.

– Public-assistance programs/welfare

• Supplemental Security Income

• Temporary Assistance for Needy families

• Medicaid

A. A

B. B

C. C

Section 2

Do you feel that your taxes should be used to assist individuals?

A. Always

B. Sometimes

C. Never

A B C

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Section 2

Regulation and Economic Stability

Stable growth, low unemployment, and low inflation are the primary economic goals of government.

Section 2

Regulation and Economic Stability (cont.)

• Two other functions of government involve:

– Regulating economic activity

View: Government Regulation

• The most important regulatory functions are dealing with externalities.

– Trying to ensure economic stability—smoothing the ups and downs in the nation’s overall business activity.

– Merit goods should be provided by private organizations instead of taxpayer dollars.

– Redistribution programs do more harm than good.

– Government regulations raise the prices of goods and services.

Section 2

Regulation and Economic Stability (cont.)

• Critics of government involvement believe that:

A. A

B. B

C. C

Section 2

Do you feel that your tax dollars should go toward merit goods?

A. Always

B. Sometimes

C. Never

A B C

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Section 2-End

Section 3-Main Idea

Section Preview

In this section, you will learn how the federal government prepares a budget and borrows funds.

A. A

B. B

C. C

Section 3-Polling Question

Do you know how the government prepares its budget?

A. Yes

B. Somewhat

C. Not at all

A B C

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Section 3

The Budget-Making Process

Congress and the president work together to prepare an annual budget showing the anticipated federal expenditures and revenues for the coming fiscal year.

Section 3

The Budget-Making Process (cont.)

• The president and various congressional offices work together to prepare the budget.

• About 18 months before the fiscal year, (October 1 through September 30th) the executive branch of the government begins to prepare a budget.

• Eventually, the president approves this budget plan, and submits it to Congress by January.

View: Federal Taxation and Spending

Section 3

The Budget-Making Process (cont.)

• Next, congress is supposed to pass two resolutions that set binding limits on spending and taxes for the upcoming year.

View: Steps in the Budget Process

• Due to delays, the fiscal year sometimes starts without a budget.

A. A

B. B

C. C

D. D

Section 3

A B C D

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According to the graph in Figure 16.3, where does the smallest chunk of federal spending go?

A. Health

B. National defense

C. Income security,Social Security,and Medicare

D. International affairs

Section 3

The National Debt

A budget deficit results when government expenditures exceed revenues collected, and the difference is financed through borrowing, which adds to the national debt.

Section 3

The National Debt (cont.)

• Most years, the government spends more than it collects causing a budget deficit.

– The government must raise extra funds through borrowing—or selling government securities to individuals, businesses, and foreign governments.

• Government overspending is called deficit financing.

Section 3

The National Debt (cont.)

• Each year the federal government creates new debt by issuing securities. At the same time, old debt is retired by paying off bonds, notes and bills as they come due.

• The total amount of outstanding debt remaining is the national debt.

• A budget surplus applies when government revenues exceed expenditures.

View: The National Debt

View: The National Debt Equation

A. A

B. B

C. C

D. D

Section 3

A B C D

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The national debt is a result of which two factors?

A. Total of all yearly deficits minus anyyearly surpluses

B. Any yearly surplusesminus total of all yearlydeficits

C. Total of all yearly deficits plus any yearly surpluses

D. Any yearly surpluses plus total of all yearly deficits

Section 3-End

Section 4-Main Idea

Section Preview

In this section, you will learn about the major principles and forms of taxation in the United States.

A. A

B. B

C. C

Section 4-Polling Question

Do you believe that all Americans should pay the same percentage of their income to federal income tax?

A. Yes

B. No

C. Not sure

A B C

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Section 4

Principles of Taxation

Taxes are usually justified according to either one’s ability to pay or the benefits received.

Section 4

Principles of Taxation (cont.)

• Taxes are usually justified according to one of two major principles:

– The benefits-received principle

– The ability-to-pay principle

A. A

B. B

Section 4

National defense falls under which principle?

A. Benefits-received

B. Ability-to-pay

A B

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Section 4

Forms of Taxation

Taxes are classified as regressive, progressive, or proportional, depending on whether the tax as a percentage of income declines, increases, or remains the same as income increases.

Section 4

Forms of Taxation (cont.)

• Three classifications of taxation:

– Proportional tax

– Progressive tax

– Regressive tax

View: Major Taxes

A. A

B. B

C. C

Section 4

The federal individual income tax system is an example of which class of taxes?

A. Proportional

B. Progressive

C. Regressive

A B C

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Section 4-End

VS 1

Government spending at all levels—federal, state, and local—has increased significantly over the years.

VS 2

Under the American free-enterprise system, the government regulates certain aspects of the economy.

VS 3

The goal of the government’s budget-making process is to balance what the government takes in with what it spends.

VS-End

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

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Economic Concepts Transparencies

Transparency 10 Income Distribution

Transparency 11 Market Failures

Transparency 12 The Role of the Government

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Vocab1

public-works projects: publicly used facilities, such as schools and highways, built by federal, state, or local governments with public money

Vocab2

Medicare: government program that provides health care for the aged

Vocab3

public goods: goods or services that can be used by many individuals at the same time without reducing the benefit each person receives

Vocab4

income redistribution: government activity that takes income from some people through taxation and uses it to help citizens in need

Vocab5

social-insurance programs: government programs that pay benefits to retired and disabled workers, their families, and the unemployed

Vocab6

Social Security: federal program that provides monthly payments to people who are retired or unable to work

Vocab7

workers’ compensation: government program that extends payments for medical care to workers injured on the job

Vocab8

public-assistance programs/welfare: government programs that make payments to citizens based on need

Vocab9

Supplemental Security Income: federal programs that include food stamps and payments to the disabled and aged

Vocab10

Temporary Assistance for Needy Families: state-run program that provides assistance and work opportunities to needy families

Vocab11

Medicaid: state and federal public-assistance program that helps pay health care costs for low-income and disabled persons

Vocab12

externalities: economic side effects or by-products that affect an uninvolved third party; can be negative or positive

Vocab13

fiscal year: year by which accounts are kept; for the federal government, October 1 to September 30 of the next year

Vocab14

budget deficit: situation when the amount of government spending exceeds its receipts during the fiscal year

Vocab15

deficit financing: government policy of spending more money than it is able to bring in through revenues

Vocab16

national debt: total amount of outstanding debt for the federal government

Vocab17

budget surplus: situation when the amount of government receipts is larger than its expenditures during the fiscal year

Vocab18

benefits-received principle: system of taxation in which those who use a particular government service support it with taxes in proportion to the benefit they receive; those who do not use a service do not pay taxes for it

Vocab19

ability-to-pay principle: principle of taxation in which those with higher incomes pay more taxes than those with lower incomes, regardless of the number of government services they use

Vocab20

proportional tax: tax that takes the same percentage of all incomes; as income rises, the amount of tax paid also rises

Vocab21

progressive tax: tax that takes a larger percentage of higher incomes than of lower incomes; justified on the basis of the ability-to-pay principle

Vocab22

regressive tax: tax that takes a larger percentage of lower incomes than of higher incomes

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