Topic 6
proposals.
FISCAL POLICY AND THE FEDERAL
BUDGET
Fiscal policy refers to the "measures
employed by governments to stabilize the
economy, specifically by manipulating the
levels and allocations of taxes and
government expenditures.  than 60—favor the bill, they can use a
The Philippine government generates
revenues mainly through personal and
income tax collection, but a small portion of
non-tax revenue is also collected through fees
and licenses, privatization proceeds and
income from other government operations
and state-owned enterprises.
How Fiscal Policy Works?
Fiscal policy is based on the theories of
British economist John Maynard Keynes. Also
known as Keynesian economics, this theory
basically states that governments can
influence macroeconomic productivity levels
by increasing or decreasing tax levels and
public spending. This influence, in turn, curbs
inflation (generally considered to be healthy
when between 2-3%), increases employment
and maintains a healthy value of money.
Fiscal policy is very important to the
economy. For example, in 2012 many worried
that the fiscal cliff, a simultaneous increase in
tax rates and cuts in government spending set
to occur in January 2013, would send the U.S.
economy back to recession. The U.S. Congress
avoided this problem by passing the
American Taxpayer Relief Act of 2012 on Jan.
1, 2013.
Why High Fiscal Deficit is a real concern?
Because it leads to an increase in future
taxes. If investors don’t refinance,
government may default, or print more
money. Printing money will cause high
inflation. Crowding-out effect. Increased
government borrowing leads to an increase
in interest rates, which leads to a decrease in
aggregate demand. The purpose of spending
more has failed.
What is federal budget?
The federal budget is the government's
estimate of revenue and spending for each
fiscal year. Like a family budget, the federal
budget itemizes the expenditure of public
funds for the upcoming fiscal year.Early in
the calendar year, the president prepares the
government’s budget for the next fiscal year,
beginning Oct. 1.The budget always sets out
detailed spending allocations for the entire
government and sometimes includes tax
The president submits the budget to Congress
for review and passage by both chambers. 
If a large number of senators object to the
budget, they may filibuster a bill—i.e.,
prevent a vote on it—unless 60 senators
vote to end the filibuster and act on its
passage. If a majority of senators—but fewer
reconciliation process that allows passage by
a majority vote.
Progressive, Proportional and Regressive
Taxes
Taxes can be categorized as progressive,
proportional and regressive based on how
their marginal tax rate changes as income
goes up
PROGRESSIVE TAXis a tax that collects a
greater share of income from those with
high incomes than from those with - lower
income. pay. A tax is progressive if you can
pay a higher marginal tax rate as your
income rises.
PROPORTIONAL TAX is a tax that is flat
percentage of income earned regardless of
level of income.A tax is proportional if your
tax rate doesn't change as your income rises.
Example: You pay the same rate at every
income level.
REGRESSIVE TAX is a people with higher
incomes pay a smaller share of their income
tax. A tax is regressive if you pay a lower
marginal tax rate as your income rises
Debt to GDP Ratio
International Monetary Fund is the
International Monetary Fund (IMF) is an
international organization that promotes
global economic growth and financial
stability, encourages international trade, and
reduces poverty.The IMF gets its money
through quotas and subscriptions from its
member countries. These contributions are
based on the size of the country's economy,
making the U.S. with the world's largest
economy, the largest contributor.One of the
IMF's most important functions is to make
loans to countries that are experiencing
economic distress to prevent or mitigate
financial crises.
World Bank
The World Bank is an international
organization dedicated to providing
financing, advice, and research to developing
nations to aid their economic advancement.
The bank predominantly acts as an
 organization that attempts to fight poverty It is intended to boost growth to a healthy
by offering developmental assistance to mi. economic level, which is required during
The World Bank Group offers a multitude of the business cycle's contractionary period.
proprietary financial assistance, products, The government seeks to reduce
and solutions for international governments, unemployment, raise consumer demand, and
as well as a range of research-based thought stop the recession. Once a recession has
leadership for the global economy at large. already arisen, it intends to end the recession
The debt-to-GDP ratio is the metric and prevents depression.
comparing a country's public debt to
its gross domestic product (GDP). By
comparing what a country owes with what it
produces, the debt-to-GDP ratio reliably
indicates that particular country’s ability to
pay back its debts. Often expressed as a
percentage, this ratio can also be interpreted
as the number of years needed to pay back
debt if GDP is dedicated entirely to debt
repayment. The debt-to-GDP ratio is
calculated by the following formula:
Debt to Gdp= Total Debt of Country/ Total
GDP of Country
The higher the debt-to-GDP ratio, the less
likely the country will pay back its debt and
the higher its risk of default, which could
cause a financial panic in the domestic and
international markets. A study by the World
Bank found that countries whose debt-to-
GDP ratios exceed 77% for prolonged
periods experience significant slowdowns
in economic growth Sovereign default is the
failure by a country's government to pay its
debt.When a country defaults on repaying its
loans, it usually approaches the IMF for
assistance in the form of loans and recovery Contractionary fiscal policy is a type of
packages.The defaulting country can also fiscal policy in which the government collects
engage in a debt restructuring plan. This can more money in tax revenue than it spends—
be done by either extending the date to these types of policies are usually used during
repay their debts or devaluing their times of economic prosperity. To enact
currency. The devaluation of the currency contractionary fiscal policy, the government
would mean faster repayment of the debts, may decrease spending, increase taxes, and
cheaper export products, and kick starting enact a combination of decreased spending
the economy. and increased taxation.

Expansionary &Contractionary
Fiscal Policy
Expansionary fiscal policy is when the
government increases the money supply in
the economy using budgetary instruments to
either raise spending or cut taxes—both
having more money to invest for customers
and companies.
Expansionary fiscal policy is intended to
boost growth to a healthy economic level,
which is required during the business cycle's
contractionary period. The government seeks
to reduce unemployment, raise consumer
demand, and stop the recession. Once
a recession has already arisen, it intends to
end the recession and prevents depression.

Money & Banking
The term 'money' is something that people
generally accept as a payment for goods and
services. It is also used to pay off debts.
Money is defined as anything that acts as a
medium of exchange
Function of Money
Money as Medium of Exchange The basic
function of money it removes all the
difficulties of barter system and removes the
double coincident of want
Unit of Account(Measure of value) It
measures the value of goods and services
and compare their value of different goods
Money as store of value goods loose their
value very quickly, It also enables to keep the
assets in the liquid form. We can sell goods
and receive money.
Money as a Transfer of value it transfer the
value from one place to another. To sell them
and convert onto money
Money as a Standard of Deferred Money
deferred payment are those which are to be
made in the future and countries use deferred
payments to payback loan.
Measuring Money: Currency, M1, M2, M3
and M4
• Coins and Currency in Circulation: the coins
and bills that circulate in an economy that are
not held by the U.S Treasury, at the Federal
Reserve Bank, or in bank vaults
• Demand Deposit: checkable deposit in banks
that is available by making a cash withdrawal
or writing a check
• Liquidity: how quickly and easily an asset
can be converted to a means of payment to
make a purchase
• M1 Money Supply: a narrow definition of
the money supply that includes currency and
checking accounts in banks and to a lesser
degree, traveler's checks.
M2 Money Supply is a definition of the
money supply that incudes everything in M1,
but also adds savings deposit, money market
funds, and certificates of deposit
• Money Market Fund: where the deposits of
many individual investors are pooled
together and invested in a safe way, such as
short-term government bonds
• Savings Deposit: which are bank accounts
on which you cannot write a check directly,
but from which you can easily withdraw the
money at an automatic teller machine or
bank. 
• Time Deposit: which are accounts that the
depositor has committed to leaving in the
bank for a certain period of time, ranging
from a few months to a few years, in exchange
for a higher interest rate
M3 is a measure of the money supply that
includes M2 as well as large time deposits,
institutional money market funds, short-term
repurchase agreements (repo), and larger
liquid assets. The M3 measurement includes
assets that are less liquid than other
components of the money supply and are
referred to as "near money," which are more
closely related to the finances of larger
financial institutions and corporations than to
those of small businesses and individuals. M4
Cash outside banks (i.e. in circulation with the
public and non-bank firms) plus private-
sector retail bank and building society
deposits plus private-sector wholesale bank
and building society deposits and certificates
of deposit. It comprises M3 and all other least
liquid assets, usually outside commercial
banks.
Financial Markets & Assets
Where do individuals put their savings,
and where do businesses obtain the
funding for investment expenditure? The
answer to both of these questions is financial
markets. Financial markets include the
banking system, equity markets like the New
York Stock Exchange, or the NASDAQ Stock
Market, bond markets, commodity markets
and more. Financial markets are global,
Americans put their savings into foreign as
well as domestic bank accounts, foreign and
domestic stocks and foreign and domestic
bonds. All financial assets are called
securities.
The Commercial Banking System
Checking Account is a bank account that
typically pays little or no interest, but that
give easy access to money either by writing a
check or by using a "debit card
Credit Union is a nonprofit financial
institution that its members own and run
Debit Card is a card that lets the person make
purchases, and the financial institution
immediately deducts cost from that person's
checking account.
Depository Institution is a institution that
accepts money deposits and then uses these
to make loans.
Financial Intermediary is an institution that
operates between a saver with financial
assets to invest and an entity who will borrow
those assets and pay a rate of return.
Payments System is a system by which buyers
and sellers exchange money for goods,
services and financial capital.