Fiscal and Monetary Policy Flashcards

Flashcards covering key terms and definitions related to fiscal and monetary policy.

Fiscal Policy

The spending and taxing policies used by the government to influence the economy.

Main Tools of Fiscal Policy

Government Spending (G) and Taxes (T or R for Tax Revenues).

Budget Surplus

Occurs when government tax revenues exceed government expenditures.

Budget Deficit

Occurs when government expenditures exceed government tax revenues.

Balanced Budget

Occurs when government tax revenues equal government expenditures.

Discretionary Fiscal Policy

Fiscal policy action initiated by an act of Congress; a deliberate change in G or T.

Automatic Fiscal Policy

Fiscal policy action triggered by the state of the economy without new legislation.

Expansionary Fiscal Policy

An increase in government spending or a decrease in taxes designed to stimulate the economy.

Contractionary Fiscal Policy

A decrease in government spending or an increase in taxes designed to slow down the economy.

Recessionary Gap

Occurs when the short-run equilibrium output is less than potential output.

Inflationary Gap

Occurs when the short-run equilibrium output is greater than potential output.

Multiplier Effect

An initial change in spending leads to a larger final change in equilibrium income.

Marginal Propensity to Consume (MPC)

The fraction of a change in income that is spent on consumption.

Marginal Propensity to Save (MPS)

The fraction of a change in income that is saved.

Fiat Money

Money that has value because of government decree, not intrinsic value.

Liquidity

The ease with which an asset can be converted into cash.

M1 Money Supply

The narrowest, most liquid measure of money including currency and demand deposits.

M2 Money Supply

A broader measure of the money supply that includes everything in M1 plus savings deposits.

The Federal Reserve (The Fed)

The central bank of the United States.

Required Reserve Ratio (RRR)

The fraction of deposits banks are required to hold as reserves by the Fed.

Discount Rate (DR)

The interest rate the Fed charges commercial banks for borrowing funds.

Open Market Operations (OMO)

The Fed's buying and selling of government bonds in the open market.

Money Demand (Md)

The total quantity of liquid money that households and firms want to hold.

Monetary Policy

Actions taken by the Federal Reserve to manage the economy and achieve macroeconomic goals.

Expansionary Monetary Policy

Fed increases the money supply to stimulate the economy.

Contractionary Monetary Policy

Fed decreases the money supply to slow down the economy.