Study Guide: Fiscal & Monetary Policy

What is fiscal policy?

Government decisions on revenue collection (taxes) and spending to influence the economy.

What is expansionary fiscal policy?

Increased government spending or tax cuts to stimulate the economy (used in recessions).

What is contractionary fiscal policy?

Decreased government spending or higher taxes to reduce inflation.

What are the tools of fiscal policy?

Expansionary fiscal policy

Contractionary fiscal policy

What is the multiplier effect?

The effect of government spending being re-spent, generating additional economic activity.

What is monetary policy?

Actions by central banks to manage the money supply and interest rates.

What is expansionary/easy money monetary policy?

Lower interest rates or buying bonds to stimulate economic growth.

What is contractionary/tight money monetary policy?

Higher interest rates or selling bonds to reduce inflation.

What are tools of monetary policy?

Interest rates, reserve requirements, and open market operations.

What is the Federal Reserve?

The central bank of the U.S., organized into 12 districts and governed by a Board of Governors.

What is easy-money policy?

A monetary policy that increases the money supply to encourage economic growth.

What is tight-money policy?

A monetary policy that reduces the money supply to control inflation.

What policies are used for high unemployment?

Expansionary fiscal or monetary policies to boost demand and create jobs.

What policies are used for high inflation?

Contractionary fiscal or monetary policies to reduce demand and stabilize prices.

What is Keynesian economics?

An economic theory advocating government intervention to stabilize demand.

What is classical economics?

An economic theory favoring minimal government involvement.

What is monetarism?

An economic theory focusing on the money supply as the key to economic performance.

What is the Laffer Curve?

A theory suggesting that beyond a certain tax rate, increasing taxes reduces revenue.

What is supply-side economics?

An approach focused on boosting production by cutting business taxes.