Chapter 35 Monetary Policy: Tools, Strategies, and Challenges, Chapter 30 Basic Macroeconomic Relationships: Income and Consumption, Chapter 32 Aggregate Supply and Demand Dynamics, Chapter 33: Fiscal Policy Overview, Chapter 34 Understanding the Fra…

Expansionary Monetary Policy

Stimulates economy during recession by increasing money supply.

Restrictive Monetary Policy

Reduces money supply to combat inflation.

Federal Funds Rate

Interest rate banks charge each other overnight.

Dual Mandate

Fed's goals: full employment and stable inflation.

Open-Market Operations

Buying/selling bonds to influence money supply.

Forward Guidance

Fed's communication on future monetary policy intentions.

Discount Rate

Interest rate for banks borrowing from the Fed.

Liquidity Trap

Low interest rates fail to stimulate economic growth.

Stagflation

Simultaneous inflation and unemployment increase.

Target Rate of Inflation

Fed aims for 2% inflation annually.

Investment

Expenditure on capital goods to increase future production.

Money Market

Market where money supply and demand interact.

Equilibrium GDP

Level of output where aggregate supply equals demand.

Cause-Effect Chain

Sequence of events linking monetary policy to GDP.

Administrative Rates

Various interest rates the Fed can influence.

Cyclical Asymmetry

Different effects of monetary policy during expansions vs. recessions.

Recognition Lag

Time taken to identify economic issues.

Operational Lag

Delay in implementing monetary policy after recognition.

Bonds

Debt securities issued to raise capital.

Money Supply

Total amount of money available in the economy.

Inflationary Expectations

Public's anticipation of future inflation rates.

Interest Rates

Cost of borrowing money, expressed as a percentage.

Economic Overheating

Excessive growth leading to inflationary pressures.

Federal Reserve

Central bank of the United States managing monetary policy.

Disposable Income (DI)

Income available after taxes for spending or saving.

Consumption (C)

Household spending on goods and services.

Saving (S)

Income not spent; can be positive or negative.

Dissaving

Borrowing or spending more than income.

Average Propensity to Consume (APC)

Fraction of total income spent on consumption.

Average Propensity to Save (APS)

Fraction of total income saved.

Marginal Propensity to Consume (MPC)

Change in consumption per change in income.

Marginal Propensity to Save (MPS)

Change in saving per change in income.

Consumption Schedule

Planned household spending at various income levels.

Saving Schedule

Planned saving at various income levels.

APC Formula

APC = Consumption / Income.

APS Formula

APS = Saving / Income.

MPC Formula

MPC = Change in Consumption / Change in Income.

MPS Formula

MPS = Change in Saving / Change in Income.

Investment Demand Curve

Shows relationship between interest rates and investment.

Real Interest Rate

Effective cost of borrowing money.

Expected Rate of Return

Profit expected from an investment.

Multiplier Effect

Change in GDP from initial spending change.

Multiplier Formula

Multiplier = 1 / (1 - MPC).

Stability of Investment

Investment levels fluctuate based on economic conditions.

Paradox of Thrift

Increased saving can reduce overall economic growth.

Interest Rate Impact

Higher rates generally decrease consumption and increase saving.

Determinants of Consumption

Factors influencing household spending behavior.

Business Taxes Impact

Higher taxes decrease investment demand.

Aggregate Supply (AS)

Total output produced at each price level.

Short Run Aggregate Supply

Input prices fixed; output prices flexible.

Long Run Aggregate Supply

Both input and output prices flexible.

Demand-Pull Inflation

Too much money chasing too few goods.

Cost-Push Inflation

Increased production costs shift AS left.

Dollar Depreciation

U.S. dollar value falls against other currencies.

Dollar Appreciation

U.S. dollar value rises against other currencies.

Exchange Rates

Value of one currency relative to another.

Productivity

Real output per unit of input.

Input Prices

Costs affecting production per unit.

Legal-Institutional Environment

Regulations affecting output costs.

Consumer Spending

Household expenditures on goods and services.

Investment Spending

Business expenditures on capital goods.

Government Spending

Expenditures by government on goods/services.

Consumer Expectations

Future outlook influencing consumer behavior.

Real Interest Rates

Interest rates adjusted for inflation.

Aggregate Demand (AD)

Total demand for goods/services at various prices.

Equilibrium Price Level

Price where AS equals AD.

Recession

Economic decline due to reduced AD.

Sticky Prices

Prices resistant to downward adjustment.

Shift Factors

Determinants that move the AS curve.

Cyclical Unemployment

Unemployment due to economic downturns.

Menu Costs

Costs associated with changing prices.

Full Employment Output

Maximum sustainable output at full employment.

Fiscal Policy

Government actions on spending and taxes.

Expansionary Fiscal Policy

Boosts employment and GDP during recessions.

Contractionary Fiscal Policy

Reduces spending to control inflation.

Discretionary Fiscal Policy

Requires legislative action for implementation.

Nondiscretionary Fiscal Policy

Automatic adjustments without legislative action.

Budget Deficit

Spending exceeds tax receipts in a year.

Budget Surplus

Tax receipts exceed spending in a year.

Automatic Stabilizers

Economic policies that automatically adjust to GDP changes.

Progressive Tax System

Higher income leads to higher tax rates.

Proportional Tax System

Flat tax rate regardless of income level.

Regressive Tax System

Higher income leads to lower average tax rates.

Recognition Lag

Delay in identifying economic changes.

Administrative Lag

Time taken for Congress to enact policies.

Operational Lag

Delay in effects of new policies.

Crowding-Out Effect

Government borrowing raises interest rates, reducing private investment.

Public Debt

Total federal deficits minus surpluses over time.

National Debt

Total amount owed by the federal government.

Treasury Bills

Short-term government securities with maturity under a year.

Treasury Notes

Medium-term government securities with 1-10 year maturities.

Treasury Bonds

Long-term government securities with maturities over 10 years.

GDP Formula (Recession)

F-16PP= C↓ + Ig ↓ + GT7 (Xn).

GDP Formula (Inflation)

F-16DP = C ↑ + Ig₁ + GV + (Xn).

Fractional Reserve System

Banks hold a fraction of deposits as reserves.

Goldsmiths

Early bankers who issued receipts as money.

Bank Run

Mass withdrawal of deposits causing bank failure.

Expansionary Monetary Policy

Fed encourages banks to increase lending.

Contractionary Monetary Policy

Fed prompts banks to decrease lending.

Interest Rate

Price paid for borrowing money, varies widely.