Economics - Topic 9 - Fiscal and Monetary Policy

fiscal policy

the use of government spending and revenue collection to influence the economy

federal budget

a written document estimating the federal government's revenue and authorizing its spending for the coming year

fiscal year

any 12-month period used for budgeting purposes

appropriations bill

a bill that authorizes a specific amount of spending by the government

expansionary policy

a fiscal policy used to encourage economic growth, often through increased spending or tax cuts

contractionary policy

a fiscal policy used to reduce economic growth, often through decreased spending or higher taxes

classical economics

a school of thought based on the idea that free markets regulate themselves

productive capacity

the maximum output that an economy can sustain over a period of time without increasing inflation

demand-side economics

an economic theory that advocates use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore expand economic activity

Keynesian economics

a school of thought that uses demand-side theory as the basis for encouraging government action to help the economy

multiplier effect

the idea that every one dollar change in fiscal policy creates a change greater than one dollar in the national income

automatic stabilizer

a tool of fiscal policy that increases or decreases automatically depending on changes in GDP and personal income

supply-side economics

an economic theory that reduction of tax rates encourages more earnings, savings, and investment and thereby expands economic activity and the total taxable national income

deficit spending

a situation when expenditures exceed revenues

John Maynard Keynes

economist associated with demand-side economics during the Great Depression

Arthur Laffer

economist associated with supply-side economics during the Reagan administration; developed a curve representing the relationship between rates of taxation and the hypothetical resulting levels of government revenue

Milton Friedman

economist associated with free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility

John Kenneth Galbraith

economist associated with Keynesian economics who greatly influenced national policies during the Johnson administration; strong supported of public spending and social welfare programs

budget surplus

a situation in which budget revenues exceed expenditures

budget deficit

a situation in which budget expenditures exceed revenues

Treasury bill

a government bond with a maturity date of 26 weeks or less

Treasury note

a government bond with a term of from 2 to 10 years

Treasury bond

a government bond that is issued in terms of 30 years

national debt

the total amount of money the federal government owes to bondholders

crowding-out effect

the loss of funds for private investment caused by government borrowing

money creation

the process by which money enters into circulation

required reserve ratio

the fraction of deposits that banks are required to keep in reserve

money multiplier formula

formula used to determine how much new money can be created with each demand deposit and added to the money supply

excess reserves

bank reserves greater than the amount required by the Federal Reserve

discount rate

the interest rate that the Federal Reserve charges commercial banks for loans

federal funds rate

the interest rate that banks charge each other for loans

prime rate

the rate of interest that banks charge on short-term loans to their best customers

open market operations

the buying and selling of government securities in order to alter the supply of money

security

a financial document, such as a stock certificate or bond, that represents ownership of corporate shares or the promise of repayment by a company or government

easy money policy

a monetary policy that increases the money supply

tight money policy

a monetary policy that reduces the money supply

inside lag

the time it takes to implement monetary policy

outside lag

the time it takes for monetary policy to have an effect

monetarism

the belief that the money supply is the most important factor in macroeconomic performance

Friedrich Hayek (1899-1992)

economist who questioned the ability to influence the economy effectively and had faith in a free economy's ability to self-adjust