EC 202 Introduction To Macroeconomics COMPLETE EXAM
NOTES 2025 Michigan State University
Class 12: Public Finance
Two Big Questions
What makes economies grow?
How can we prevent recessions?
Public Finance
Public: related to government
Public Finance:
How governments get money (taxes)
How governments spend money
Federal Taxes
Income tax: tax based on income
Payroll tax: Type of income tax used to pay for spending, including Social
Security, Medicare, and Medicaid
Mandatory spending is spending that is required by law and not subject to the
annual federal budget process.
Who Pays the Tax?
Income tax rate: Tax Paid/ Income
Progressive: Average tax rate increases as income increases
Richer you get, the higher you pay in taxes
Proportional: Average tax rate constant for all income levels
Everyone pays the same amount of taxes
Regressive: Average tax rate decreases as income increases
Iclickers
Sarah makes $50,000 per year and pays $5,000 in taxes. Hannah makes
$100,000 per year and pays $20,000 in taxes.
a. Progressive tax
b. Proportional tax
,c. Regressive tax
, Sarah pays a 10% rate and Hannah pays a 20% rate.
A newly formed nation experiences a $1 billion budget deficit its first year, a $2 billion
budget surplus in its second year, and a $2 billion budget deficit in its third year. What is
the national debt?
a. $1 billion
b. $2 billion
c. $3 billion
d. $5 billion
-1 + 2 + -2 = -1
The US federal income tax is progressive
Medicare is 1.45% and is a proportional tax
Social Security is a 6.2% but only the first $132,900 is taxable and is
regressive for those who make more than that
Federal Spending
Most federal spending is on mandatory expenditures: Social Security,
Medicare, Medicaid
74% of federal spending goes to mandatory expenditures and interest on the
national debt
Almost half of discretionary spending goes to defense
“An insurance company with an army”
State and Local Taxes Budget Deficits and Surpluses
Like individuals and businesses, governments can borrow money to pay their
bills
Budget surplus: When government revenue exceeds government
expenses. Typically calculated annually.
Budget Deficit: When government revenue is less than government
expenses. Typically calculated annually.
National debt: The total amount owed by a nation’s government.
To calculate a surplus or deficit, calculate Revenue- Expenses
NOTES 2025 Michigan State University
Class 12: Public Finance
Two Big Questions
What makes economies grow?
How can we prevent recessions?
Public Finance
Public: related to government
Public Finance:
How governments get money (taxes)
How governments spend money
Federal Taxes
Income tax: tax based on income
Payroll tax: Type of income tax used to pay for spending, including Social
Security, Medicare, and Medicaid
Mandatory spending is spending that is required by law and not subject to the
annual federal budget process.
Who Pays the Tax?
Income tax rate: Tax Paid/ Income
Progressive: Average tax rate increases as income increases
Richer you get, the higher you pay in taxes
Proportional: Average tax rate constant for all income levels
Everyone pays the same amount of taxes
Regressive: Average tax rate decreases as income increases
Iclickers
Sarah makes $50,000 per year and pays $5,000 in taxes. Hannah makes
$100,000 per year and pays $20,000 in taxes.
a. Progressive tax
b. Proportional tax
,c. Regressive tax
, Sarah pays a 10% rate and Hannah pays a 20% rate.
A newly formed nation experiences a $1 billion budget deficit its first year, a $2 billion
budget surplus in its second year, and a $2 billion budget deficit in its third year. What is
the national debt?
a. $1 billion
b. $2 billion
c. $3 billion
d. $5 billion
-1 + 2 + -2 = -1
The US federal income tax is progressive
Medicare is 1.45% and is a proportional tax
Social Security is a 6.2% but only the first $132,900 is taxable and is
regressive for those who make more than that
Federal Spending
Most federal spending is on mandatory expenditures: Social Security,
Medicare, Medicaid
74% of federal spending goes to mandatory expenditures and interest on the
national debt
Almost half of discretionary spending goes to defense
“An insurance company with an army”
State and Local Taxes Budget Deficits and Surpluses
Like individuals and businesses, governments can borrow money to pay their
bills
Budget surplus: When government revenue exceeds government
expenses. Typically calculated annually.
Budget Deficit: When government revenue is less than government
expenses. Typically calculated annually.
National debt: The total amount owed by a nation’s government.
To calculate a surplus or deficit, calculate Revenue- Expenses
