Fiscal Policy and Money

Business cycle

The short-term fluctuations experiences in the economy due to changes in levels of economic activity.

Recession

A decline in real output for at least 2 consecutive quarters.

Expansion

A phase of the business cycle characterized by increasing real GDP, income, and employment.

Full-employment rGDP

The level of real GDP produced in an economy when it's operating at the natural rate of unemployment.

Fiscal Policy

Changes in government purchases or taxes designed to achieve full employment and low inflation.

Expansionary Fiscal Policy

The application of fiscal policy to increase aggregate demand, involving increased government purchases or decreased taxes.

Contractionary Fiscal Policy

The application of fiscal policy to decrease aggregate demand, involving decreasing government purchases or increasing taxes.

Multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar’s worth of real GDP.

MPC (Marginal Propensity to Consume)

The fraction of each additional dollar of income that is spent on consumption.

MPS (Marginal Propensity to Save)

The fraction of each additional dollar of income that is saved.

Automatic Stabilizers

Features of existing government policy that automatically steady the economy by decreasing government spending or increasing taxes as the economy grows.

Progressive tax

A tax in which the average tax rate increases as taxable income increases.

Crowding Out

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment.

Liquidity

The degree to which an asset can be readily converted into currency.

M1

The most liquid measure of the money supply; includes currency in circulation, demand deposits, and other liquid assets.

M2

A broader measure of the money supply that includes M1 and adds in other, less-liquid forms of money like small-denomination time deposits.

Equation of Exchange

A mathematical identity, MV=PY, which states that the money supply (M) times velocity (V) is equal to the price level (P) times output.

Velocity of money

The number of times, on average, and in a given time period that each dollar in a nation's money supply is used to make purchases.