USGOV: Fiscal and Monetary Policy

Fiscal Policy

The use of government tax policy and spending policy in order to impact the economy.

Monetary Policy

The Federal Reserve is the government agency that sets “monetary policy.” The “Fed” is independent, and therefore reacts to economic situations and ignores political implications.

Expansionary Policy

Involves increasing government spending and/or lowering taxes in order to “expand” the amount of money in the economy.

Contractionary Policy

Involves decreasing government spending and/or increasing taxes in order to “contract” the amount of money in the economy.

Progressive tax

A tax rate that increases (or progresses) as taxable income increases. (Income tax on individuals.)

Regressive tax

A tax that takes a larger percentage of income from low-income groups than from high-income groups. (Payroll tax to fund Social Security.)

Flat tax

A single tax rate applied to all taxpayers regardless of income.

Inflation

The rate of increase in prices over a given period of time.

What are 3 monetary policy decisions made by the Federal Reserve.

US Securities Being Sold, Discount Rates, Reserve Requirement Percentages.

US Securities Being Sold

Delivered to people willing to lend the government their money. More money lent to the government = contractionary. Less money lent to the government = expansionary.

Discount Rates

It is the interest rate the Federal Reserve charges commercial banks and other financial institutions for short-term loans. An increase results in a contractionary, a decrease results in an expansionary policy.

Reserve Requirement Percentages

The percentage of money banks need to keep in their vaults. High RR = contractionary, low RR = expansionary.