Monetary and Fiscal Policy

Flashcards covering key vocabulary and concepts related to monetary and fiscal policy.

Fiscal and Monetary Policies

Policies used to ensure economic expansions and contractions are not too severe.

Keynesian Economics

An economist who favors fiscal and monetary policy to manage economic fluctuations.

Monetary Policy

The Federal Reserve's control over interest rates and the amount of money in reserve.

Reserve Ratio

The amount of money banks must keep on hand at all times.

Discount Rate

Interest rates charged to banks, set by the FOMC.

Open Market Operations

Buying and selling of government bonds to influence the money supply.

Tight Money Policy

Implemented when inflation is rising too quickly, typically involving actions by the Federal Reserve to slow spending.

Tight Money Policy Actions

Actions by the Federal Reserve to slow spending: Increase Interest Rates/Discount rate, Increase Reserve Requirement/Ratio, Sell more government bonds.

Easy (loose) Money Policy

Implemented when unemployment is rising, typically during a nation's contraction phase. Actions by the Federal Reserve to increase spending.

Easy (loose) Money Policy Actions

Actions by the Federal Reserve to increase spending: Lower interest/discount rates, Lower reserve requirement/ratio, Buy back government bonds.

Fiscal Policy

Congress’s power over taxes and government spending.

Fiscal Policy Tools

Examples: Taxes, Government Spending, Transfer Payments

Contractionary Policy (Tight $$)

Implemented during inflation to reduce excessive money supply. Fiscal Policy: Increase taxes, Decrease gov’t spending, Decrease transfer payments. Monetary Policy: Increase interest rates, Increase reserve requirements, Open market operations (sell more government bonds).

Expansionary Policy (Easy or Loose $$)

Implemented during high unemployment to increase money supply. Fiscal Policy: Decrease taxes, Increase government spending, Increase transfer payments. Monetary Policy: Decrease interest rate, Decrease reserve requirements , Open market operations (buy back government bonds).