ECO 202 FINAL

monetary policy

the actions the federal reserve takes to manage the money supply and interest rates

goals of monetary policy

price stability, high employment, economic growth, and stability in financial markets

federal funds rate

interest rate banks charge each other for overnight loans

expansionary monetary policy

decreases interest rates to stimulate an economy during a recession or below potential GDP

contractionary monetary policy

increases interests rates to slowdown an overheating (above potential GDP) economy

fiscal policy

the changes in federal taxes and government spending; president and congress

budget deficit

tax revenues < government spending

contractionary fiscal policy

a requirement to have an annual balance budget can force a government to conduct _________ during a recession

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

expansionary fiscal policy

increase in government spending and/or decrease in taxes

• increase aggregate demand

contractionary fiscal policy

decrease in government spending and or increase in taxes

• decrease in aggregate demand

recession

increase budget deficits because they automatically decrease tax revenues and increase government spending

expansion

decrease budget deficits because the automatically increase tax revenues and decrease government spending

national debt

the sum of past budget deficits minus budget surpluses

supply side economics

how changes in marginal tax rates effect the incentives to work, save, invest, and start a business

• expand the productive capacity and increase the rate of economic growth

laffer curve

shows the relationship between tax rates and tax revenue

appreciation

an increase in the foreign exchange value of the dollar

depreciation

a decrease in the foreign exchange rate of the dollar

appreciation

_____ of the dollar raises the costs of US exports and lowers the cost of imports, decreasing exports

impact of appreciation

decreases spending on US real GDP; therefore, decreasing the aggregate expenditure line and decreasing the aggregate demand curve

demand for dollars

by foreign firms and households in order to purchase US goods, services, and assets

supply of dollars

US firms and households in order to purchase foreign goods, services, and assets

demand for dollars increases

US interest rates increase, foreign interest rates decrease, or foreign financial assets become more risky

nominal GDP

The measure of production that values production using current prices is called

personal consumption expenditure price index

What price index does the Federal Reserve use for its average inflation target?

minus

The real rate of interest is the nominal interest rate _____ the inflation rate

dual mandate

the goals of price stability and maximum employment a referred to as

2

for price stability the fed has an average inflation target of ____ percent