fiscal and monetary policy

gross domestic product

sum of all final goods and services produced in the nation in a year

gross domestic product

country's economy

consumer spending, business investment, government spending, net exports

gross domestic product

consumer spending

70% of GDP

net exports

exports - imports (xn = x-m)

trade balance

exports - imports

trade deficit

more imports than exports

trade surplus

more exports than exports

balanced trade

exports = imports

social insurance taxes

payroll taxes

customs duties

tariffs

tariffs

custom duties

gift taxes

tax limit 13000/ both giver and receiver have to pay taxes

16.3 trillion

national debt

export

domestic products

import

foreign products

c - i - g - xn

gdp

gdp

3% (ideal)

pl

2% (ideal)

unemployment

5% (ideal)

2 2 7.9

actual gdp, pl, and unemployment

inflation or price level

general increase in prices in a society; rule of 70

high inflation

destroys purchasing power of the poor, middle, and upper middle class (devastating/ best under 2%)

recession

when an economy shrinks or contracts for 6 straight months or longer. The economy must have negative growth for 2 quarters or more

underperforming or recessionary

if economy is growing at less than 3 percent

overheating, unsustainable growth, inflationary

if the economy is growing at a rate over 3% and has a lower than 5% unemployment rate, and/or an inflation rate above 2%

government

what represents over 35% of US GDP

federal government

plays a significant role in moderating the economy's ups and downs, trying to keep inflation low while promoting steady economic growth

modified free enterprise system

what system does the US run with

keynesian economics

formulated by John Maynard Keynes; economy is inherently unstable. If the there's an overheating/underperforming economy, the gov should use fiscal policy to flatten out the business cycle. If a recession, government spending (and/or cutting taxes) should increase to stimulate economy.This would cause a budget deficit.

budget deficit

borrowing in one year

national debt

sum of all borrowing through history

government budget

tax revenue - government spending

tax revenue

gov budget - gov spending

gov spending

gov budget - tax revenue

balanced budget

tax revenue - gov spending = 0

budget surplus

tax reveunue - gov spending = + x

budget deficit

tax reveunue - gov spending = - x

budget deficit

according to keynes, what is okay in the short run to stimulate the economy

fiscal policy

when the gov intervenes in its economy to stimulate it when it is underperforming or to slow it down when it is overheating

stimulate

action the gov/fed should take when there is an underperforming economy

government spending and taxes

two tools involved in fiscal policy

government

president and congress

increase government spending, cut taxes, or both

using fiscal policy, stimulate an underperforming or recessionary economy

expansionary fiscal policy

gov policy to stimulate economy

consumer spending and business investment

what will directly change after increasing/decreasing gov spending

disposable income

a tax cut will lead to an increase in _______

disposable income

income after taxes

budget deficit

what is one negative aspect of expansionary fiscal policy

balance the budget

what should the gov do after using expansionary fiscal policy (very rare)

5 years

since 1930, how many years did US have of budget surpluses

contractionary fiscal policy

policy to slow down an overheating economy/ prevent inflation

contractionary fiscal policy

cut gov spending, increase taxes, or both

moving towards budget surplus

benefit of contractionary fiscal policy

price stability and economic growth and low employment

what are the two goals of central banks

monetary policy

policy controlled by country's central bank, not government

federal reserve or the fed

us central bank

monetary policy

policy involving controlling the supply of money and the cost of borrowing money - credit (interest rates)

federal reserve

controls the money supply that circulates in the economy, down the last penny; can add money or take money out of circulation of the economy

money supply and interest rates

inverse relationship between and_

interest rate

price one must pay to borrow someone else's money (home loans, student loans, car loans, personal loans, business loans, etc.)

interest rates will fall

if a country's central bank increases the money supply, ____

decrease in price

surplus ->

surplus

increase of country's money supply

excess supply

caused by more money entering banking system

...

Banks lend out surplus money to make a profit; they lower interest rates to entice borrowers

interest rates will rise

decrease in money supply

increase in price

shortage->

reserve requirement, federal funds rate, discount rate, and open market operation

four monetary policy tools to change money supply

money supply

what does the fed manipulate to stimulate/slow the economy

federal funds rate

an overnight, bank to bank loan

discount rate

the rate a bank must pay to borrow from the fed

open market operation

the buying and selling of treasury bonds (government securities)

treasury bonds

government securities

government securities

treasury bonds

tight or contractionary monetary policy

to slow an overheating or inflationary economy

loose monetary policy, expansionary monetary policy, easy money, easing

to stimulate an underperforming economy

required reserves

the amount of reserves banks must hold in their vault or with the fed and that the banks cannot lend out; a percent of deposits the bank must hold in reserves ad cannot lend out

excess reserves

loanable funds

loanable funds

loans

more money supply

decrease in required reserves

deposits

what are bank's number one source of icome

deposits

svgs, chkg, cds, money mkts

excess reserves or loanable funds

deposits - required reserves

increase in interest rates

decrease in loanable funds (bank)

sell bonds to slow economy

"sell bonds slows"

deposits, another bank, fed

three sources of income for a bank (list them in bank's preference)

credit

loans or lending

credit crisis

when lending stops

credit crunch

when lending stops 2

belt tightening

when lending stops 3

to slow overheating economy

increase the reserve requirement

to stimulate underperforming economy

decrease rr

loanable funds

direct effect of increase/decrease in required reserves

federal funds rate

interest rate a bank must pay to take an overnight bank to bank loan

to borrow the amount of reserves necessary to comply with federal law

why would a bank take an overnight loan from another bank

banks take more risks and lend more money

when ffr is low

to slow overheating economy

increase ffr

discount rate

interest rate a bank must pay to borrow directly from the fed

banks take more risk and lend more money

low discount rate