Fiscal and Monetary Policy Overview

Recessionary Gap

When actual output is less than potential output.

Government Transfers

Payments made by the government to individuals.

Contractionary Fiscal Policy

Policy that decreases aggregate demand.

Automatic Stabilizers

Fiscal rules that stabilize the economy automatically.

Discretionary Fiscal Policy

Deliberate government actions to influence the economy.

Budget Balance

Difference between government revenues and expenditures.

Fiscal Policy

Government actions to influence aggregate demand.

Aggregate Demand

Total demand for goods and services in the economy.

Inflationary Gap

When actual output exceeds potential output.

Expansionary Fiscal Policy

Policy that increases aggregate demand.

Government Purchases

Government spending on goods and services.

Tax Cuts

Reduction in the amount of taxes owed.

Surplus

When revenues exceed expenditures, reducing debt.

Deficit

When expenditures exceed revenues, increasing debt.

Money

Any asset used to purchase goods and services.

Currency in Circulation

Cash held by the public.

Checkable Bank Deposits

Bank accounts from which checks can be written.

Money Supply

Total value of financial assets considered money.

Liquid Assets

Assets easily convertible to cash.

Medium of Exchange

Accepted payment method for goods and services.

Store of Value

Holds purchasing power over time.

Unit of Account

Standard measure of value for goods and services.

Commodity Money

Money with intrinsic value, like gold or silver.

Fiat Money

Money with value from official status only.

Monetary Aggregate

Overall measure of the money supply.

M1

Most liquid forms of money.

M2

Includes near-moneys easily convertible to cash.

Bank Reserves

Currency held by banks plus Federal Reserve deposits.

Reserve Ratio

Fraction of deposits banks hold as reserves.

T-account

Tool for analyzing a business's financial position.

Bank Run

Mass withdrawal of deposits due to bank failure fears.

Contagious Bank Runs

One bank run triggers loss of faith in others.

Deposit Insurance

Guarantee of depositor payment despite bank insolvency.

Capital Requirements

Banks must hold more assets than deposits.

Reserve Requirements

Minimum reserve ratio set by the Federal Reserve.

Discount Window

Federal Reserve lends money to troubled banks.

Shadow Banks

Financial firms not covered by bank regulations.

Investment Banks

Banks that underwrite securities and facilitate mergers.

Money Market Funds

Investment funds that invest in short-term debt securities.

Money Multiplier

Ratio of money supply increase to reserves.

Monetary Base

Sum of currency in circulation and bank reserves.

Federal Reserve System

Central bank regulating banking and monetary policy.

Board of Governors

Federal Reserve leadership appointed by the president.

Federal Open Market Committee

Group making monetary policy decisions in the Fed.

Federal Funds Market

Market for banks to borrow reserves from each other.

Federal Funds Rate

Interest rate for overnight bank loans.

Open-Market Operations

Buying/selling government securities to influence money supply.

Expansionary Monetary Policy

Policy aimed at increasing aggregate demand.

Contractionary Monetary Policy

Policy aimed at decreasing aggregate demand.

Treasury Bills (T-Bills)

Short-term government securities sold to raise funds.

Loans Increase

More bank lending leads to higher money supply.

Inflation Trigger

Printing money to fund deficits can cause inflation.