ECO-2207 Exam 2: Macroeconomics, Public Finance, and Monetary Policy Review

Comprehensive vocabulary flashcards covering macroeconomics, public finance, fiscal policy, money and banking, the Federal Reserve, and monetary policy based on the ECO-2207 practice exam materials.

Federal Reserve

The nation's central bank, responsible for conducting monetary policy and regulating the commercial banking industry.

Money

Whatever is generally accepted in exchange for goods and services.

M1 Money Supply

A measure of the money supply consisting solely of items directly and immediately usable as a medium of exchange, including currency, demand deposits, and interest-earning checkable deposits (excluding credit card balances).

M2 Money Supply

A broad measure of the money supply that includes all components of $M1$ plus non-checkable near-monies, such as small time deposits (e.g., CDs), savings deposits (including money-market deposit accounts), and money-market mutual funds held by individuals.

Medium of Exchange

The function of money when it is used to buy goods and services during transactions, eliminating the need for a double coincidence of wants.

Unit of Account

The function of money when it serves as a standard numerical yardstick to measure and compare the relative prices and values of different goods and services.

Store of Value

The function of money that allows individuals to transfer purchasing power into the future and delay purchases until they wish to consume.

Keynesian View of the Great Depression

The macroeconomic viewpoint that prolonged periods of high unemployment can persist in an economy if aggregate demand is deficient.

Marginal Propensity to Consume (MPC)

The fraction or proportion of an additional dollar of disposable income that households spend on consumer goods and services.

Marginal Propensity to Save (MPS)

The fraction of an additional dollar of disposable income that households save rather than spend, governed by the mathematical relationship $MPC + MPS = 1$.

Simple Expenditure Multiplier

The numerical coefficient indicating the multiple by which a change in autonomous spending alters total equilibrium real GDP, calculated as $\frac{1}{1 - MPC}$ or $\frac{1}{MPS}$.

Negative Real Shock Dilemma

A critique of Keynesian activist monetary policy advocates (KAMPers) pointing out that if inflation stems from an adverse supply shock, pursuing restrictive monetary policy to curb price increases will worsen the contraction and make unemployment worse.

Crowding-Out Effect

A phenomenon wherein debt-financed government spending or budget deficits cause higher interest rates in the money market, which subsequently reduces private investment and consumption spending, offsetting the initial fiscal expansion.

Liquidity Trap

A situation where the public's preference to hold money balances is persistently high, preventing interest rates from falling low enough to stimulate sufficient investment to pull the economy out of a recession.

Fiscal Policy

Macroeconomic policy enacted by the federal government through intentional adjustments in taxation and government spending to influence aggregate demand.

Budget Deficit

A fiscal condition occurring when federal government expenditures exceed tax revenues over a given budget year.

Budget Surplus

A fiscal condition occurring when federal government tax revenues exceed expenditures over a given budget year.

National Debt

The total cumulative value of annual differences between federal tax revenues and government expenditures over time.

Progressive Tax

A tax structure under which the average tax rate increases as income rises (or decreases as income declines), claiming a larger fraction of income from higher-income individuals.

Regressive Tax

A tax structure that claims a smaller percentage of income as total income increases.

Proportional Tax

A tax structure where the average tax rate remains constant across all income levels, taking an identical percentage regardless of income.

Average Tax Rate

The percentage of taxable income paid in taxes, calculated as total taxes divided by total taxable income ($\frac{\text{Taxes}}{\text{Income}}$).

Automatic Stabilizers

Built-in structural mechanisms—such as progressive income tax revenue automatically falling and transfer payments automatically rising as real GDP decreases—that moderate economic contractions without discretionary legislation.

Board of Governors of the Federal Reserve

The central governing leadership of the Federal Reserve System, consisting of members appointed by the President to staggered $14$-year terms.

Federal Open Market Committee (FOMC)

The policymaking body within the Federal Reserve responsible for setting monetary policy and directing the purchase and sale of U.S. government securities in the open market.

Fractional Reserve Banking

A banking system in which commercial banks retain only a fraction of their total deposits in reserves while lending out the remaining excess reserves.

Money Creation

The process by which new money enters the economy when commercial banks extend loans to customers from excess reserves.

Monetary Multiplier

The maximum multiple by which the money supply expands per dollar of new reserves, equal to $\frac{1}{\text{Required Reserve Ratio}}$.

Open Market Operations

The buying and selling of U.S. government bonds and securities by the Federal Reserve to adjust commercial bank reserves and manage the money supply.

Required Reserve Ratio

The legally mandated percentage of deposits that commercial banks must hold either as vault cash or on reserve at the regional Federal Reserve Bank.

Discount Rate

The interest rate that the Federal Reserve charges commercial banks when lending to them directly through the traditional discount window.

Federal Funds Rate

The interest rate that commercial banks charge one another for overnight borrowing of excess reserves.

Velocity of Money

The average number of times a single dollar exchanges hands to purchase final goods and services included in GDP during a given year.

Equation of Exchange

The fundamental monetary accounting identity stating that the money supply multiplied by velocity equals the price level multiplied by real domestic output ($M \times V = P \times Y$).

Quantity Theory of Money

The proposition that changes in the money supply lead directly to proportionate changes in the price level ($P$), meaning that rapid long-run monetary growth primarily results in inflation.

Expansionary Monetary Policy

Central bank actions aimed at expanding the money supply and lowering real interest rates—such as purchasing government bonds or reducing reserve requirements—to stimulate aggregate demand and real GDP.

Restrictive Monetary Policy

Central bank actions aimed at reducing the money supply and raising interest rates—such as selling government securities, raising reserve requirements, or increasing interest paid on excess reserves—to shift aggregate demand leftward.