Fiscal and Monetary Policy

Money

medium of exchange, measure of value, store of value

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Federal Reserve System

The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates

M1 money supply

a narrow definition of the money supply that includes currency and checking accounts in banks,

federal deficit

the amount by which the national government's annual expenditures exceed its revenues in taxes

federal debt

all the money borrowed by the federal government over the years and still outstanding, accumulation of deficits, now over $20 trillion and increasing

Treasury Bonds

Bonds issued by the federal government, sometimes referred to as government bonds. Sold in the Open Market Operations of the FED

Government Spending

includes spending by all levels of government on final goods and services, expressed as G in the formula GDP=C+I+G+Xn

price inflation

A situation in which too much money is chasing too few goods, pushing up prices of goods and services. Occurs during full employment and increases in government spending

recession (or a threat of recession)

Economic condition in the business cycle where government spending that creates a deficit in the federal budget is desirable

federal debt

most of this is owed to the government and US private individuals and private institutions

entitlement programs

Government benefits that certain qualified individuals are entitled to by law, regardless of need, examples are social security and welfare

bank reserves

the currency that banks hold in their vaults plus their deposits at the Federal Reserve

excess reserves

a bank's reserves over and above its required reserves and can be loaned out

recession (increase in bank loans)

lower the discount rate, decrease reserve requirements, buy treasury bonds

increase in commercial bank loans

result of reducing interest rates by the FED

discount rate

the minimum interest rate set by the Federal Reserve for lending to other banks.

reserve requirement (ratio)

The amount of money the Fed requires banks to keep on hand to meet their liabilities. Its size helps determine how much banks can lend.

fiscal policy

the use of government spending and tax policy to influence the economy, needs Congress and the President to make policy

monetary policy

can be adjusted quickly compared to fiscal policy

fiscal policy during recession

government increase spending to stimulate demand
cut taxes to increase disposable income

Fiscal Policy Tools

government spending and taxes

ability to pay principle

principle of taxation in which those with higher incomes pay more taxes than those with lower incomes, regardless of the number of government services they use

benefits received principle

people who benefit directly from public goods should pay for them in proportion to the amount of benefits received, i.e. hunting license, drivers license, athletic fees

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

expansionary monetary policy

Federal Reserve system actions to increase the money supply, lower interest rates
loose money policy.

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

contractionary monetary policy

the Federal Reserve's policy of increasing interest rates to reduce inflation, reduce the money supply
tight money policy

proportional tax

A tax by which the government takes the same percentage of income from all income groups

regressive tax

A tax whereby people with lower incomes pay a higher percentage of their income than people with higher incomes.

progressive tax

A tax graduated so that people with higher incomes pay larger percentage of their income than people with lower incomes.