D089 - Module 9 - Stabilization Policies
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65 Terms
Medium of Exchange
Money is used as a method of payment for goods and services.
Store of value
People use money to preserve purchasing power from the present to the future.
Unit of account
Money is used to measure and compare the values of goods and services.
Standard of deferred payment
Loans and future agreements are stated in monetary terms.
List the characteristics of successful currencies.
Durable, divisible, portable, and resistant to counterfeiting
An item that is used as money but has value in a different use. Eg/ Gold
Commodity money
Money that is declared by the government to be legal tender
Fiat Money
Currency + Checkable Deposits + Traveler's Checks
M1
M1 + Savings + Money market funds
M2
The central bank in the United States
Federal Reserve
What are the responsibilities of the FED?
Conducting monetary policy, regulating financial institutions, providing banking services to depository institutions, and promoting financial stability.
fractional reserve banking system
banks keep a fraction of deposits as reserves and use the rest to make loans
Who controls monetary policy at the Fed?
Federal Open Market Committee (FOMC)
What function of money is this? Buying a car with cash.
Medium of Exchange
What function of money is this? Comparing car prices.
Unit of Account
What function of money is this? Savings for a car.
Store of Value
What function of money is this? Borrowing to purchase a car.
Standard of deferred payment
In the U.S., who is responsible for fiscal policy?
Congress and the president
The use of government spending and taxes to stabilize the economy.
Fiscal policy
What are the tools of fiscal policy?
taxes and government spending
What actions can the government take if it wants to enact expansionary fiscal policy?
Increase government spending, decrease taxes
What actions can the government take if it wants to enact contractionary fiscal policy?
Decrease government spending,increase taxes
Increase government spending, decrease taxes
Based on the graph, fiscal policy actions should the government take?
How does an increase in government spending impact the goods market?
AD shifts right, price level and GDP rise
How does a decrease in government spending impact the goods market?
AD shifts left, price level and GDP fall
An increase in taxes will...
Shift AD left
A decrease in taxes will...
Shift AD right
Unemployment compensation, Social Security, and income taxes are examples of...
Automatic stabilizers
When congress passes a bill that increases spending.
Discretionary spending
When government spending exceeds tax revenues.
Budget deficit
When government spending is less than tax revenues.
Budget surplus
Each year the national debt will increase by the amount of the...
Budget deficit
During a recession, the budget deficit increases due to...
Automatic Stabilizers
Measure used to compare the national debt of two countries.
Debt-to-GDP ratio
The fraction of deposits that banks hold as reserves
Required Reserves
The fraction of deposits that a bank can lend out
Excess Reserves
What happens in the money market when incomes rise?
Money demand shifts to the right and interest rates rise.
What happens in the money market when the price level falls?
Money demand shifts to the left and interest rates fall.
What happens in the money market when the supply of money increases?
Money supply shifts to the right and interest rates fall.
What happens in the money market when the money supply decreases?
Money supply shifts to the left and interest rates rise.
How does expansionary monetary policy impact the goods market?
AD increases, price level rises and GDP rises.
How does contractionary monetary policy impact the goods market?
AD decreases, price level falls and GDP falls
The interest rate banks charge each other.
Federal Funds Rate
The interest rate the Fed charges banks.
Discount Rate
When the Fed buys securities, the money supply...
Increases
When the Fed sells securities, the money supply...
Decreases
Treasury bonds are an example of...
Securities
When the Fed lowers the required reserve ratio, the money supply...
Increases
When the Fed raises the required reserve ratio, the money supply...
Decreases
When the Fed lowers the discount rate, the money supply...
Increases
When the Fed raises the discount rate, the money supply...
Decreases
When the FED lowers the interest paid on reserves at the FED, the money supply...
Increases
When the FED raises the interest paid on reserves at the FED, the money supply...
Decreases
Who conducts monetary policy?
Federal Reserve
What type of monetary policy does the FED use to fight a recession?
Expansionary
What type of monetary policy does the FED use when there are concerns about inflation in the economy?
Contractionary
Expansionary
Based the graph, what type of monetary policy should the FED use?
Contractionary
Based on the graph, what type of monetary policy should the FED use?
Expansionary monetary policy means the Fed will ____________ the money supply.
Increase
In order to increase the money supply, the Fed will...
Buy Bonds
Contractionary monetary policy means the Fed will ____________ the money supply.
Decrease
In order to decrease the money supply, the Fed will...
Sell Bonds
What does the short run Phillips Curve show?
Trade-off between inflation and unemployment
What does the long run Phillips Curve show?
Inflation and unemployment are unrelated.
According to the Phillips Curve, what level of unemployment will we have in the long run?
The natural rate of unemployment