Economic Principles and Monetary Policy

A comprehensive set of flashcards detailing key economic terms and monetary policy concepts.

Discretionary Fiscal Policy

A deliberate policy change made to fiscal tools to help the economy, not automatic.

Automatic Stabilizers

Built-in features of fiscal policy that automatically adjust with economic fluctuations to stabilize income and consumption.

Recessionary Gap

When the economy operates below full capacity, requiring expansionary fiscal policy to address.

Expansionary Gap

Occurs when the economy operates above full capacity, necessitating contractionary fiscal policy to reduce aggregate demand.

Natural Rate of Unemployment

The level of unemployment that exists even when the economy is at potential output.

Budget Deficit

A situation where government expenditure exceeds revenue.

Classical Economics

An economic theory advocating for 'laissez-faire,' meaning minimal government intervention in the economy.

Functional Finance

The concept of using fiscal policy to achieve economic goals rather than balancing budgets annually.

Commodity Money

Money that has intrinsic value and also serves as a commodity, such as gold or silver coins.

Fiat Money

Money that does not have intrinsic value and is not redeemable for a commodity, established as money by government decree.

Fractional Reserve Ratio System

A banking system where banks only hold a fraction of deposits as reserves.

Liquidity

A measure of how easily an asset can be converted into cash without significant loss of value.

M1

A measure of the most liquid forms of money, including currency and demand deposits.

M2

A broader measure of money supply including M1 plus savings deposits and small time deposits.

Federal Open Market Committee

The committee responsible for making decisions about open-market operations that influence money supply.

Reserve Ratio

The percentage of a bank's deposits that must be kept in cash or as reserves.

Money Multiplier

The amount by which the money supply is increased for every dollar of reserves.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage.

Expansionary Fiscal Policy

Policy aimed at increasing government purchases or decreasing net taxes to boost aggregate demand.

Contractionary Fiscal Policy

Policy aimed at decreasing government purchases or increasing net taxes to lower aggregate demand.

Barter

The direct exchange of goods without using money, reliant on a double coincidence of wants.

Token Money

Money whose face value exceeds its cost of production, such as paper money.

Legal Tender

Currency that constitutes a valid and legal offer of payment of debt.

Financial Intermediaries

Institutions that facilitate the flow of funds between savers and borrowers.

Federal Reserve System

The central bank of the United States responsible for regulating the money supply and monetary policy.

Board of Governors

The seven-member governing body of the Federal Reserve System responsible for setting and implementing monetary policy.