Government Policy

Keynesian Multiplier

a factor that indicates the final impact on an economy of an initial injection of spending/expenditure

Autonomous Expenditure

spending that happens regardless of the economy’s production

Induced Expenditure

the results of autonomous expenditure

Why is consumption most likely to grow?

consumer confidence

How does autonomous expenditure affect owners FOPs

generates new income

Positive Multiplier

when an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in GDP

Negative Multiplier

when an initial increase in a leakage (or a decrease in an injection) leads to a greater final decrease in GDP

Withdrawal

a leakage in fiscal policy terms

Assumptions Made to Use the Keynesian Multiplier

spending increases the creation of products without increasing price level, interest rates are stagnant, exports and imports aren’t considered

Why would the government use a negative multiplier

to reduce inflation, a deficit, negative externalities, or AD

Interest Rates

the price of borrowing money or the return from saving money

Demand-Side Policy

any government strategy or plan to reduce AD

Money Supply

the entire quantity of money circulating in an economy

Functions of a central bank

executing monetary policy, managing the government’s money, regulating the banking system, issuing legal tender, bailouts, credit control

Credit Control

manipulation of the minimum

reserve ratio to control the amount of lending

Goals of Monetary Policy

low and stable inflation, low unemployment, reducing business cycle fluctuations, promoting a stable economic environment, managing the external balance

Inflation Targeting

the practice of using monetary policy to achieve a specific rate of inflation

External Balance

the value of a nation’s export earnings being equal to or approximately equal to the value of its import expenditure

Credit/Money Creation

the process by which banks create money from deposits of savers and borrowers

Minimum Reserve Ratio

the percent of a bank’s money thta must be placed with the central bank

Money Multiplier

a way to calculate how much an initial deposit increases the money supply

Money Multiplier Formula

1/reserve ratio