ECO 100: EXAM 4 FINAL

budget deficit

if government spending is greater than tax revenues

budget surplus

if tax revenues are greater than government spending

balanced budget

government spending is equal to tax revenues

fiscal policy

the use of government expenditures and taxes to promote macroeconomic goals

government spending

only spent by the public sector of the acquisition of goods and provision of services such as education, healthcare, defense, and social protections

tax revenue

the major source of revenue collected by governments through various forms of taxation, including business, property, income, value-added, and sales tax, which finance public investments and services

full employment

a situation in which all available labour resources in an economy are being used, and no significant surplus of unemployed workers (no cyclical UE)

stable prices

where the price level is constant over time

economic growth

an increase in the size of a country’s economy (GDP) over time

expansionary fiscal policy

this increases real output (GDP), employment and national income

contractionary fiscal policy

this deceases real output (GDP), employment and national income also decreasing inflation

public savings

tax revenue - government spending

national savings

real GDP (y) - household consumption (C) - government spending (G)

private savings

real GDP (y) - tax revenue (T) - household consumption (C)

nominal GDP

price x income

How does the government combat recession?

By conducting an expansionary fiscal policy which increases the AD curve (shift curve to the right)

How does the government increase aggregate demand?

an increase in government spending, a decrease in taxes, or a combination of the two

loanable funds (LF)

the money available in an economy for lending and borrowing

How does the government combat inflation?

by conducting a contradictory fiscal policy which decreases the AD curve (shift curve to the left)

how doe the government decrease aggregate demand?

by decreasing government spending, increasing taxes, or a combination of both

heated economy

rapid growth and high inflation, often resulting from excessive consumer spending from excessive consumer spending and low unemployment rates hat exceed sustainable levels

disposable income

the money left after paying taxes

discretionary fiscal policy

deliberate use of changes in government spending and taxes to influence the economy

automatic stabilizers

changes in government spending and taxes that occur automatically as the economy fluctuates

recognition lag

time between the beginning of a problem and the realization that there is a problem

administrative lag

inability to get quick action of fiscal policy because of the way congress operates

operational lag

the time it takes a fiscal policy, once enacted to be put into operation

effectiveness lag

time it actually takes for a fiscal policy to affect the economy

irreversibility

once a policy is put into place, it tends to become permanent

inflationary bias

for political reasons, congress favors expansionary policies over contradictory policies

crowding out effect

this occurs during an expansionary fiscal policy

government debt

the cumulative amount of borrowing by the government over the nations history

money

sets of assets that the people regularly use to purchase goods or services from other people

medium of exchange

something people are willing to accept in payment for goods or services

barter

trading goods and services directly for other goods and services

unit of account

allows consumers to compare relative values of goods due to the stated prices of goods

store of value

ability to save money and then use it to make future purchases

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value, used as money because of government decree

M1

= currency + demand deposits + other checkable deposits

currency

coins + paper money

demand deposits

checkable deposits that don’t pay interest

other checkable deposits

checkable deposits that pay interest

liquid

immediately spendable money that can be used as a medium of exchange

monies

interest paying deposits that can be easily converted to spendable money

M2

= M1 + savings accounts + small time deposits + money market deposit accounts + money market mutual funds

M3

= M2 + large time deposits

money stock

the quantity of money circulating in the economy

saving accounts

accounts in which earn interest but the rate is not fixed and withdrawals are limited

time deposits

deposits that usually offer a guaranteed rate of interest for a specified term: also called certificate pf deposits (CD)

money market deposit accounts (MMDA)

these pay a higher interest rate than checking accounts but have higher minimum balance and limited withdrawals

money market mutual funds

a collection of short term interest earning assets purchased with funds collected by many shareholders

bank

financial institutions that issue checking and savings accounts and is the funds to make consumer, business, and mortgage loans

federal reserve

central bank of the US

board of governors

7 members in the government appointed by the president to regulate banks and contribute to the nations monetary policy and oversee the reserve banks

T account

a simplified accounting statement that shows a banks assets and liabilities

How do banks make a profit?

they make a profit on the interest differential between what they pay on deposits and what they earn on loans

what are reserves?

deposits that banks have received but have not lent out

required reserves

minimum amount of vault cash and deposits at the federal reserve that must be maintained by a bank

required reserve ratio

percentage of checking deposits that must be kept as vault cash or deposits at the federal reserve

excess reserves

reserves in excess of required reserves

required reserves

=(r.) x (checking deposits)

excess reserves

(checking deposits) - (required reserves)

what does a bank do with excess reserves?

it loans out all its excess reserves and so excess reserves = loans

federal reserves

the central bank of the US

board of governors

7 appointed governors with one designated as chair

federal open market committee (FOMC)

oversees the purchases and sales of US government bonds which are called open market operations

Reserve bank

12 reserve banks across the US in New York, Chicago, Dallas, etc

money supply (MS)

the total amount of money—cash, coins, and balances in bank accounts—in circulation

monetary policy

changing the money supply to achieve max growth while keeping prices stable

monetary policy instruments

the ways the Fed can control money supply

open market operations

buying and selling of government bonds

changing the discount rate

the interest rate banks pay for borrowing from the Fed

required reserve ratio

percentage that the banks are required to keep

expansionary (easy) policy

the Fed increases the MS

how would the fed increase MS?

buy government bonds or decrease discount rate or decrease r

when would the Fed use an expansionary policy?

during a recession

how does an increase in the MS affect the economy?

assume the economy is on the upward sloping portion of AS curve

restrictive (tight) policy

the Fed decreases the MS

how would the Fed decrease the MS?

sell government bonds, increase discount rate, increase r

when would the Fed use restrictive monetary policy?

during demand pull inflation

how does a decrease in the MS affect the economy?

assume the economy is on the upward sloping portion of AS curve

liquidity trap

this occurs when near zero interest rates set by Fed fail to increase

why d countries trade?

they trade on the basis of the law of comparative advantage

law of comparative advantage

countries specialize in producing those goods in which they are relatively more efficient

free trade

trae that is not impeded or obstructed by trade restrictions