Chapter 17

Question 1

Fiscal Policy

Answer 1

the set of a government’s policies relating to its expenditure and taxation rates

Question 2

Goals of Fiscal Policy

Answer 2

• keeping a low and stable rate of inflation
• low unemployment rate
• stable economic environment for long-term growth
• reduce fluctuations in the business cycle
• achieve balance between with net exports

Question 3

Expansionary Fiscal Policy

Answer 3

(Keynesian) policies used to increase AD
- “trade-off’ between lower unemployment and higher inflation
- effective at dealing with a deep recession

Question 4

Contractionary Fiscal Policy

Answer 4

(Keynesian) policies used to decrease AD

Question 5

Keynesian Multiplier

Answer 5

a value to represent the multiplied effect of how a government investment benefits the economy

Question 6

Monetary Policy

Answer 6

the set of official policies governing the supply of money and the level of interest rates in an economy

Question 7

Goals of Monetary Policy

Answer 7

• keeping a low and stable rate of inflation
• low unemployment rate
• stable economic environment for long-term growth
• reduce fluctuations in the business cycle
• achieve balance between with net exports

Question 8

Expansionary Monetary Policy

Answer 8

used to increase AD
- when the base rate is lowered, AD increases
- “trade-off” between lower unemployment and higher inflation

Question 9

Contractionary Monetary Policy

Answer 9

used to decrease AD

Question 10

Nominal Interest Rate

Answer 10

the rate of interest available in the money market, not allowing for inflation

Question 11

Real Interest Rate

Answer 11

the rate of interest adjusted for inflation

Question 12

Capital Expenditures

Answer 12

includes any spending that adds to the capital stock of the economy (infrastructural)

Question 13

Current Expenditures

Answer 13

ongoing spending such as the purchases of textbooks in schools or the payment of wages to public sector employees

Question 14

Transfer Payments

Answer 14

include any benefits paid to people in
the economy for which no goods and services are produced in return (unemployment benefits, child support)

Question 15

Time-Lags

Answer 15

a period of time between when a policy is implemented and when its effects can be seen

Question 16

Expansionary Fiscal Policy Effect on Net Exports

Answer 16

1. increase in demand
2. increase in interest rates
3. exchange rate becomes higher
4. exports seem less attractive to foreign countries
5. imports also become more attractive
6. lead to a fall in net exports (X-M)

Question 17

Crowding Out

Answer 17

theory that argues that rising public sector spending drives down or even eliminates private sector investment

Question 18

National Debt

Answer 18

the accumulation of all the budget deficits over the years and shows the amount of money that the government owes

Question 19

Debt Servicing Costs

Answer 19

the amount of money needed to make payments on the interest of a loan in a given time period

Question 20

Injections

Answer 20

government spending, investment, ___

Question 21

Withdrawals

Answer 21

government taxes, saving, spending on imports

Question 22

Marginal Propensity to Consume (MPC)

Answer 22

the percent of additional income spent on goods and services

Question 23

Base Rate

Answer 23

the interest rate set by the central bank

Question 24

Central Bank

Answer 24

the ultimate authority in control of the money supply in an economy

Question 25

Inflation Targeting

Answer 25

when the central bank sets a target inflation rate as a goal

Question 26

Credit Creation

Answer 26

the process of how the money supply of an economy is increased

Question 27

Minimum Reserve Requirement

Answer 27

the percentage of deposits that commercial banks are legally required to hold in reserve by the central bank

Question 28

Money Multiplier

Answer 28

. 1 ________________________________ minimum reserve requirement

Question 29

Quantitive Easing

Answer 29

the introduction of new money into the economy by the central bank to increase AD

Question 30

Discount Rate

Answer 30

the interest rate that the central bank charges to commercial banks