AP Gov: Topic 4.9 - Ideology and Economic Policy Study Guide

fiscal policy

part of economic policy that is concerned with government spending and taxation

supply-side economics

supply-side theorists —fiscal conservatives— believe that the government should leave as much of the money supply as possible with the people, letting the laws of economics, such as supply and demand, govern the marketplace

Sixteenth Amendment (1913)

trumped the Court and allows Congress to tax people's incomes

Internal Revenue Service (IRS)

oversees income tax collection

progressive tax

increases or progresses

monetary policy

how the government manages the supply and demand of its currency and thus the value of the dollar

inflation

rising prices and devaluation of the dollar

Federal Reserve Board

board of seven "governors" appointed by the president and approved by the Senate for staggered 14-year terms

discount rate

interest rate at which the government loans actual dollars to commercial banks

reserve requirement

how much cash commercial banks must keep in their vaults

bonds

securities

globalization

process of an ever-expanding and increasingly interactive world economy

trade balance

nation that exports more than it imports

North American Free Trade Agreement (NAFTA)

lifted trade barriers among the three largest North American countries: the United States, Canada, and Mexico

flat rate

same rate

multiplier effect

mechanism by which an increase in spending results in an economic growth greater than the amount of spending

What is fiscal policy and which entity controls it?

Fiscal policy involves government spending and taxation, and it is under the control of Congress.

What is monetary policy and which entity controls it?

Monetary policy manages the supply, demand, and value of currency, and it is controlled by the Federal Reserve.

What is supply-side economics?

An economic theory favored by fiscal conservatives proposing that government should leave money with taxpayers and allow supply and demand to govern the market.

What power did the Sixteenth Amendment (1913) grant to Congress?

It granted Congress the power to levy an income tax on individuals.

What is the primary role of the Internal Revenue Service (IRS)?

To oversee and enforce the collection of federal income taxes.

How does a progressive tax system operate?

Tax rates increase or progress higher as an individual's taxable income increases.

What is inflation?

An economic condition characterized by rising prices for goods and services and a devaluation of currency.

How is the Federal Reserve Board structured?

It consists of seven governors appointed by the president and approved by the Senate for staggered 14-year terms.

What is the discount rate set by the Federal Reserve?

The interest rate at which the federal government loans actual dollars to commercial banks.

What is the reserve requirement for commercial banks?

The specific amount of cash commercial banks are required to hold in their vaults rather than loan out.

What role do government bonds play in economic policy?

They are government securities bought and sold by the Federal Reserve to regulate the nation's money supply.

What is globalization in an economic context?

The process of creating an ever-expanding, interconnected, and interactive world economy.

What defines a positive trade balance for a nation?

An economic state achieved when a country exports a greater value of goods than it imports.

What was the main outcome of the North American Free Trade Agreement (NAFTA)?

It eliminated trade barriers and tariffs between the United States, Canada, and Mexico.

How does a flat tax rate function?

All taxpayers pay the exact same percentage rate regardless of their total income level.

What is the multiplier effect in fiscal policy?

The phenomenon where an initial increase in government spending produces economic growth greater than the spending amount.

How do liberals view government intervention in the economy?

They favor active government regulation and spending to keep the economy strong and reduce inequality.

Which economic approach do liberals favor for fiscal policy?

Keynesian economics, which advocates using government spending to stimulate demand and stabilize the economy.

How do conservatives view government intervention in the economy?

They favor minimal government involvement, preferring free market forces to dictate economic choices and limit public debt.

Which economic approach do conservatives favor for fiscal policy?

Supply-side economics, which focuses on tax cuts and deregulation to stimulate production and economic growth.

How do liberals and conservatives differ on monetary policy?

Conservatives generally favor using monetary policy to stabilize the economy, whereas liberals view it as too slow to produce prompt economic change.

What is the libertarian ideology regarding economic policy?

Libertarians advocate for the absolute minimum amount of government intervention in both fiscal and monetary affairs.