Econ 1000 Chapter 8

stabilization function

attempts by government to minimize fluctuations in overall macroeconomic activity

fiscal policy

government policies related to spending and revenue generation

monetary policy

government policies which determine a nation’s money supply

budget deficit

occurs when government spending exceeds revenues

budget surplus

occurs when government revenues exceed spending

expansionary fiscal policy

increases in government spending or decreases in taxes with the aim of stimulating overall economic activity

contractionary fiscal policy

decreases in government spending or increases in taxes with the aim of dampening overall economic activity

crowding out

decreases in private spending that occur following increases in government spending

money supply

the amount of money in circulation in an economy

velocity of money

the number of times that a typical dollar is used in market transactions in a single year

overall price level

the average of all prices of goods/services produced

aggregate level of output

a measure of the real quantity of goods/services produced

equation of exchange

an identity which relates the money supply, velocity of money, overall price level, and aggregate level of output to each other

loanable funds market

the collection of all markets in which lenders and borrowers interact (mortgage markets, auto loan markets, consumer credit markets, business loan markets)

expansionary monetary policy

an increase in the money supply which provides a short term stimulus to the macro-economy, resulting in higher levels of output, employment, and incomes

contractionary monetary policy

a decrease in the money supply which dampens overall economic activity, resulting in lower levels of output, employment, and incomes in the short term (but greater stability in the long term)

central bank

entity which has the ability to alter the money supply of an economy (U.S: Federal Reserve)

fractional reserve banking system

a system in which at any point in time a commercial bank is only required to retain a portion of the money it has accepted as deposits

open market operations

buying and selling of U.S Treasury debt securities to and from the public

setting of reserve requirements

minimum restrictions on the amount of money that a bank must keep on hand at any point in time, in the form of either cash in its vault or deposits with the central bank

setting of discount rate

setting the interest rate that the Fed charges banks on short-term loans