Chapter 15: Economic Policy

public policy

A law, rule, statute, or edict that expresses the government's goals and provides for rewards and punishments to promote their attainment.

full employment

The theoretical point at which all citizens who want to be working have a job.

economic depression

A deep, widespread downturn in the economy.

inflation

The increase in the price of consumer goods over time.

Council of Economic Advisers (CEA)

A group created by the Employment Act of 1946, that provides objective data on the state of the economy and makes policy recommendations to the president.

deflation

A decrease in the general prices of goods and services.

gross domestic product (GDP)

The value of a country's economic output taken as a whole.

balanced budget

A spending plan in which the government's expenditures are equal to its revenue.

current account

The balance of a country's receipts and its payments in international trade and investment.

trade deficit

A measure of how much more a nation imports than it exports.

fiscal policy

Government decisions about how to influence the economy by taxing and spending.

monetary policy

Government decisions about how to influence the economy using control of the money supply and interest rates.

budget making

The processes carried out in Congress to determine how government money will be spent and revenue will be raised.

budget reconciliation

The process by which congressional committees are held to the spending targets specified in the resolution. During this process, the House and Senate Budget Committees combine the changes from all the legislative committees into an omnibus bill to be approved by Congress.

United States Trade Representative (USTR)

An agency founded in 1962 to negotiate with foreign governments to create agreements, resolve disputes, and participate in global trade-policy organizations. Treaties negotiated must be ratified by the Senate.

National Economic Council (NEC)

A group of advisers created in 1993 to work with the president to coordinate policy.

Federal Reserve System

An independent agency that serves as the central bank of the United States to bring stability to the nation's banking system.

Treasury Department

A cabinet-level agency that is responsible for managing the federal government's revenue. It prints currency, collects taxes, and sells government bonds.

Federal Reserve Board

The group of seven presidential appointees who govern the independent agency that serves as the central bank of the United States.

Keynesian economics

The theory that governments should use policies, like taxing and spending, to maintain stability in the economy.

supply-side economics

The theory that lower tax rates will stimulate the economy by encouraging people to save, invest, and produce more goods and services.

marginal tax rate

The tax rate paid on income up to some threshold.

business cycle

The normal pattern of expansion and contraction of the economy.

mandatory spending

Expenditures that are required by law, such as the funding for Social Security.

discretionary spending

Expenditures that can be cut from the budget without changing the underlying law, which is everything other than defense, entitlements, and interest on the debt.

regressive

Taxes that take a larger share of poor people's income than wealthy people's income, such as sales taxes and payroll taxes.

progressive

Taxes that require upper-income people to pay a higher tax rate than lower-income people, such as income taxes.

monetarist theory

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.

reserve requirement

The minimum amount of money that a bank must have on hand to back up its assets.

discount rate

The interest that a bank must pay on a short-term loan from the Federal Reserve Bank.

federal funds rate (FFR)

The interest that a bank must pay on an overnight loan from another bank.

open market operations

The process by which the Federal Reserve System buys and sells securities to influence the money supply.

budget deficit

The amount by which government spending in a given fiscal year exceeds its revenue.