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Flashcards in Fiscal and Monetary Policy Deck (33):
1

Federal Funds Rate

Interest rate which one bank lends funds to another bank overnight

2

Money Supply

Tool which the Federal Reserve makes policy

3

Quantity of Money

Affects the supply curve in the market for loanable funds, affecting the interest rate in the market

4

Target Interest Rate

Federal Funds Rate

5

Expansionary Money Policy

Policy that increase the supply of money and the quantity of loans: also called "loose" monetary policy

6

Effects of Expansionary Monetary Policy

Decreases federal funds rate

7

Contractionary Monetary Policy

Policy that decreases the supply of money and the quantity of loans; also called "tight" monetary policy

8

Effects of Contractionary Policy

Increase in the federal funds rate

9

Overall Thoughts on the Federal Reserve

Announces a target for the federal funds rate, then uses open market operations to affect the money supply such that the effective federal funds rate matches the target

10

Discount Rate

Interest Rate the Fed charges when lending to banks

11

Effective Federal Funds Rate

Determined by market forces

12

Tight/Contractionary Policy

Fewer Loanable Funds - Higher Interest Rate

13

Felt Effects of Tight Monetary Policy

Business investment will decline; less attractive to borrow money and the opportunity cost of investing are higher
Financing of large consumer purchases becomes more expensive with higher interest, encouraging such purchases

14

Felt Effects of Loose/Expansionary Policy

Business investment will increase; more attractive to borrow money and the opportunity cost of investing are lower.
Financing of large consumer purchases becomes less expensive with lower interest, discouraging such purchases

15

Velocity

Describes how quickly money circulates through the economy - higher velocity means that the average dollar circulates more times in a year

16

Excess Reserves

Banks are hesitant to lend, and expansionary monetary policy may not work as well

17

Velocity

Nominal GDP/Money Supply

18

Basic Quantity Equation - Money

Money Supply x Velocity = Nominal GDP

19

Inflation- Targeting

A rule that the central bank is required to focus only on keeping inflation low

20

Political Influence

Central Banks public elections can lead to expansionary monetary policy and high unemployment

21

Budget Surplus

When the government receives more in taxes than it spends in a year

22

Budget Deficit

When the government spends more than it collects in taxes in a given year

23

Balanced Budget

When government spending and taxes are equal

24

Taxation

Individual Income Tax, Corporate Income Tax, Payroll Tax

25

Progressive/Regressive Tax

A tax that collects greater//smaller share of income from those with higher income that those with lower income

26

Proportional (Flat) Tax

Tax as a flat percentage of income earned, regardless of level of income

27

Government Debt

The total accumulated amount that the government has borrowed and not yet paid back over time

28

Fiscal Policy

Economic Policies that involve government spending and taxes

29

Expansionary Fiscal Policy

When fiscal policy increases the level of government spending (G) and thus increases the level of aggregate demand, either through increases in government spending or cuts in taxes

30

Contractionary Fiscal Policy

When fiscal policy decreases the level of government spending (G) and thus decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

31

Discretionary Fiscal Policy

When the government passes a new law that explicitly changes overall tax or spending levels

32

Automatic Stabilizers

Tax and spending rules that have the effect of increasing aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

33

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