Macro Final Cards

Vocabulary flashcards based on lecture notes about Monetary and Fiscal Policy.

Money

Any asset that is generally accepted as payment for goods and services or repayment of debt.

Barter Economies

Economies where goods and services are exchanged directly for other goods and services without using money.

Medium of Exchange

A function of money; it is used to facilitate buying and selling without the need for bartering.

Unit of Account

A function of money; it measures the value of goods and services, which is reflected in pricing.

Store of Value

A function of money; it allows money to be saved and retrieved in the future without loss of value.

Standard of Deferred Payment

A function of money; it enables credit options and delayed payments (e.g., mortgages, car loans).

Standardized Quality

A criterion for acceptable money; it ensures uniformity in units.

Durability

A criterion for acceptable money; it maintains value and quality over time.

Valuable Relative to Weight

A criterion for acceptable money; it must be affordable and easy to transport.

Divisible

A criterion for acceptable money; it is the ability to break into smaller units without losing value.

Commodity Money

A type of money that has intrinsic value (e.g., gold).

Fiat Money

A type of money that has no intrinsic value; its value is determined by government decree (e.g., US dollar).

Gold Standard

A monetary system where money is backed by a physical commodity like gold.

Federal Reserve

An institution established to manage the money supply and serve as a lender of last resort during crises.

M1

A money-supply measurement that includes physical currency in circulation and demand deposits (checking accounts).

M2

A broader measure of the money supply including M1 and less liquid forms like savings accounts and CDs.

Open Market Operations

Buying or selling U.S. Treasury securities to manage the money supply.

Expansionary Monetary Policy

Buying securities increases the money supply.

Contractionary Monetary Policy

Selling securities decreases the money supply.

Treasury Bills

Short-term treasury securities that mature in 1 year or less.

Treasury Notes

Medium-term treasury securities that mature in 2-10 years.

Treasury Bonds

Long-term treasury securities that mature in approximately 30 years.

Discount Rate

The interest rate charged to banks for loans from the Federal Reserve.

Reserve Requirements

The minimum fraction of deposits banks are required to keep in their accounts.

Recession

A period characterized by high unemployment and slow economic activity.

Inflation

Occurs when the money supply grows faster than real GDP.

Quantity Theory of Money

MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

Fiscal Policy

Enacted by Congress and the President to influence the economy through taxation and government spending decisions.

Monetary Policy

Conducted by the Federal Reserve, involving money supply and interest rates.

Expansionary Fiscal Policy

Used during recessions to reduce unemployment by increasing government purchases or cutting taxes.

Contractionary Fiscal Policy

Implemented when inflation is high to decrease spending, often through tax hikes or reduced government expenditure.

Automatic Stabilizers

Elements that automatically adjust based on economic changes without direct government intervention (e.g., tax revenues increase as incomes rise).

Discretionary Fiscal Policy

Specific policy actions taken by the government to adjust spending and taxes for economic intervention.

Government Expenditures

Total spending by the government, which includes transfer payments that do not directly purchase goods or services.

Government Purchases

Expenditures for goods and services that the government buys (e.g., military equipment).

Transfer Payments

Payments made by the government to individuals, such as Social Security and welfare.

Government Purchases Multiplier

Indicates that a change in government spending produces a larger effect on GDP than the initial spending amount.

Tax Multiplier

A change in taxes also leads to multiplier effects, but typically less impactful than government spending.

Crowding Out Effect

Increased government spending can lead to higher interest rates, reducing private sector investment.

Stagflation

Occurs when both inflation and unemployment rise simultaneously.

Phillips Curve

Graphically represents the relationship between inflation and unemployment rates.

Short Run Phillips Curve

Downward sloping, showing an inverse relationship between inflation and unemployment.

Long Run Phillips Curve

Vertical, represents the natural rate of unemployment.

Real Wage Formula

(Nominal Wage / Price Level) × 100

Expansionary Policy

Used to shift the economy from point A to point B to stimulate growth.

Contractionary Policy

The response to inflation concerns; involves actions like selling treasury securities or raising the discount rate.

Commodity Money

Has intrinsic value (e.g., gold, silver).

Fiat Money

Value is derived only as currency without inherent value.

Hyperinflation

Extraordinarily high inflation rates, typically above 50% annually.

Federal Funds Rate

The interest rate banks charge each other for overnight loans.

The Fed's Monetary Policy Goals

Price Stability, High Employment, Economic Growth, and Stability of Financial Markets

Aggregate Demand

Consumption, investment spending, and net exports

M1 definition from review notes

Currency in circulation, checking account deposits, and savings account deposits.

M2 defintion from review notes

Includes M1 plus other items like mutual funds.

Barter

Goods and services exchanged without money.

Effect of Inflation on Real Wage

If actual inflation exceeds expectations, real wages decline, making labor cheaper for employers.

Federal Reserve Intervention During Recession

Policy action to increase money supply and lower interest rates to combat recession.

Inflation

The result if money supply grows faster than real GDP.

Buying Securities

The tool used to increase money supply during expansionary monetary policy.

Encourages Borrowing/Investment

The effects of lowering the discount rate.

Increases Money Supply

Action of lowering reserve requirements.

Zimbabwe's Hyperinflation

Historical example of hyperinflation mentioned.

Fiscal Policy Actors

Congress and the President influence the economy through taxation and government spending decisions.

Expansionary Fiscal Policy Goal

Policy focused on increasing government purchases or cutting taxes during recessions to reduce unemployment.

Contractionary Fiscal Policy Goal

Policy aimed at decreasing spending through tax hikes or reduced government expenditure when inflation is high.

Automatic Stabilizers Definition

Term for elements adjusting automatically to economic changes without direct government intervention.

Discretionary Fiscal Policy Definition

Term for specific policy actions taken by the government to adjust spending and taxes for economic intervention.

Government Purchases Multiplier Effect

Multiplier indicating the larger effect on GDP from a change in government spending.

Crowding Out Effect Cause

Reason increased government spending can lead to higher interest rates, reducing private sector investment.

Stagflation Scenario Definition

Economic scenario needing careful management from the Federal Reserve characterized by Inflation and Unemployment rising.

Phillips Curve Purpose

Curve representing the relationship between inflation and unemployment rates.

Long Run Phillips Curve Representation

Curve type representing the natural rate of unemployment.

Impact on Money Supply

Impact on money supply increases (expansionary) and decreases (contractionary) on graphs.

Impact on Interest Rates

Impact on interest rates increases (contractionary) and decreases (expansionary) on graphs.

Change in Real GDP or Price level

Graph that shifts the money demand curve.