ECON - Fiscal and Monetary Policy

Income Tax

A tax levied on individual or household earnings, including wages, salaries, and other income.

Marginal Tax Rate

The tax rate applied to the last dollar of taxable income earned.

Corporate Tax

A tax imposed on a corporation's profits.

Payroll Tax

Taxes withheld from employees' wages to fund social insurance programs like Social Security and Medicare.

Excise Tax

A tax on specific goods, such as alcohol, tobacco, and gasoline.

Average Tax Rate

Total taxes paid divided by total taxable income, expressed as a percentage.

Progressive Taxation

A tax system where the tax rate increases as income increases.

Regressive Taxation

A tax system where the tax rate decreases as income increases.

Mandatory Spending

Government expenditures required by law, such as Social Security and Medicare.

Discretionary Spending

Government expenditures that are negotiated and decided annually through the budget process, such as defense and education.

National Deficit

The difference between government spending and revenue in a given fiscal year, where spending exceeds revenue.

National Debt

The total amount of money the government owes to creditors, accumulated from past budget deficits.

Interest Payments

Payments made by the government to service its debt, covering the interest on borrowed funds.

Contractionary Fiscal Policy

Government actions involving reduced public spending or tax increases to slow down economic growth and control inflation during an economic boom.

Expansionary Fiscal Policy

Government actions involving increased public spending or tax cuts to stimulate economic growth during a recession.

Crowding Out

When increased government spending reduces private sector spending or investment due to limited resources.

Skill Mismatch

When there is a mismatch between the skills potential workers have and the skills that open jobs require.

Automatic Stabilizers

Economic policies and programs, like unemployment benefits and progressive taxes, that automatically adjust to counteract economic fluctuations without additional government action.

Deposits

Money placed in a financial institution for safekeeping, often in a bank account. These funds can be withdrawn or used for transactions, and they usually earn interest over time.

Reserves

Funds that banks keep on hand and do not lend out, either as cash in vaults or as deposits with a central bank. They serve as a liquidity buffer and are often required by regulatory authorities.

Bank Run

When the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank's solvency.

Interest Rate

The price for money that is borrowed or saved.

Central Bank

The term used to describe the authority responsible for policies that affect a country's supply of money and credit.

Monetary Policy

The term for how the Fed controls the money supply to manage the overall economy.

Open Market Operations

The buying and selling of government securities by the central bank to/from other banks.

Moral Hazard

The increased risk of irresponsible behavior when an individual or entity is shielded from the consequences of that behavior.

Systemic Risk

The potential for a disruption in the financial system to trigger severe instability or collapse across the entire economy.

Lender of Last Resort

A role assumed by a central bank, when it provides emergency liquidity to financial institutions facing insolvency or severe distress, to prevent systemic collapse.

Contractionary Monetary Policy

When the central bank raises interest rates, aiming to reduce inflation and stabilize the economy.

Expansionary Monetary Policy

When the central bank lowers interest rates to stimulate the economy.

Administered Rates

Interest rates that are set and controlled by a central authority, usually a central bank or a government institution.

Aggregate Demand (AD)

The total quantity of goods and services demanded across all levels of an economy at a particular price level and in a given period.

Dual Mandate

The economic policy objectives that central banks, particularly the Federal Reserve in the United States, aim to achieve: stable prices and maximum sustainable employment.

Money Creation

The process by which the money supply of a country is increased, typically through central banking operations.

Independence of the Central Bank

The autonomy it has from the government to make monetary policy decisions, such as setting interest rates and controlling money supply, without political interference.

Coordinating Expectations

How the Fed uses communication to manage public expectations on economic matters. This is effective because everyone knows others are also listening to the Fed.

Federal Funds Rate

The interest rate that banks lend/borrow at from each other.

Interest on Reserve Balances

The interest rate the Federal Reserve pays banks for keeping reserves at the Federal Reserve.

Government Securities

Loans made by investors to the government. An example includes T-bills, which are short-term IOUs issued by the government that promise to pay back the invested amount after a set period.

Discount Rate

The interest rate banks pay the Federal Reserve to borrow reserves from them.