Expansionary Fiscal Policy and Money Supply

These flashcards cover key concepts related to expansionary fiscal policy, fiscal multipliers, money supply, and the effects of government borrowing.

What is the goal of expansionary fiscal policy?

To increase aggregate demand during a recession by increasing government spending or decreasing taxes.

What is the spending multiplier formula?

1 / (1 - MPC)

What is the tax multiplier formula?

-MPC / (1 - MPC)

What are automatic stabilizers?

Government programs that naturally counter economic fluctuations (e.g., taxes and unemployment benefits).

What is the reserve ratio?

The fraction of deposits that a bank must keep in reserve.

What does the Fed use the federal funds rate for?

To control short-term interest rates and influence the money supply.

What are the three functions of money?

Medium of exchange, unit of account, store of value.

What is the money multiplier formula?

1 / reserve ratio

What's the difference between M1 and M2?

M1 = cash + checking; M2 = M1 + savings + time deposits + money market funds.

What is the crowding-out effect?

When government borrowing raises interest rates, reducing private investment.