Fundamentals of Economics - Fiscal and Monetary Policy Review

Vocabulary-style practice flashcards covering key definitions and formulas for fiscal and monetary policies based on the lecture notes.

Fiscal Policy

The government’s spending and taxing policies to influence the country's macroeconomic performance and level of economic activity.

Monetary Policy

The behavior of the Central Bank concerning the nation’s money supply and the manipulation of interest rates.

Discretionary Fiscal Policy

The deliberate changes in government’s spending and taxing policies.

Automatic Stabilizers

Fiscal policies concerning government transfer payments such as unemployment compensation, social security benefits, welfare payment, and subsidies.

The Multiplier Effect

Additional shifts in aggregate demand resulting when expansionary fiscal policy increases income and thereby increases consumer spending, where each ringgit spent can raise demand by more than a ringgit.

Marginal Propensity to Consume (MPC)

The fraction of extra income that a household consumes rather than saves, used in the spending multiplier formula $\frac{1}{1 - MPC}$.

The Crowding-Out Effect

The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.

Tax Multiplier

The change in aggregate demand (total spending) resulting from an initial change in taxes, calculated as $\text{Tax Multiplier} = 1 - \text{Spending Multiplier}$.

Recognition Lag

The amount of time taken to realize that fiscal policy actions are needed to alter the outcomes of an economy, involving figuring out the current state and forecasting the future.

Operational Lag

Also known as Impact Lag, it is the time taken from passing a tax or spending change to implementing the new arrangements and their effects on real output being felt.