Understanding Fiscal and Monetary Policy Concepts

Fiscal Policy

Government decisions on taxation and spending to influence the economy.

Controlled by?

The federal government, specifically Congress and the President.

First Proposed By?

John Maynard Keynes during the Great Depression.

Revenue / Largest for Federal Gov?

Individual income taxes.

3 Major Economic Powers in U.S. Constitution

Taxation, borrowing money, and regulating commerce.

Proportional Tax

A tax rate that remains the same regardless of income.

Progressive Tax

A tax rate that increases as income increases.

Regressive Tax

A tax rate that takes a larger percentage from lower incomes.

Sales Tax

A tax on goods and services at the point of sale.

Property Tax

A tax on land and buildings.

Tariffs

Taxes on imported goods.

Excise Tax

A tax on specific goods like alcohol and gasoline.

Local Taxes Pay For ...

Schools, police, fire departments, and local infrastructure.

State Taxes Pay For ...

Education, highways, and state government services.

Federal Taxes Pay For ...

National defense, social programs, and infrastructure.

Expansionary Fiscal Policy

Government increases spending or cuts taxes to stimulate the economy.

Expansionary FP - Why Do It?

To boost economic growth and reduce unemployment.

Contractionary Fiscal Policy

Government decreases spending or raises taxes to slow the economy.

Contractionary FP - Why Do It?

To control inflation and prevent economic overheating.

Recognition Lag

The delay in identifying economic problems.

Administrative Lag

The delay in implementing economic policies.

Operational Lag

The time it takes for policies to affect the economy.

National Debt

The total amount the government owes from borrowing.

Budget Surplus

When government revenue exceeds spending.

Budget Deficit

When government spending exceeds revenue.

Classical Economics

The belief that free markets regulate themselves without government intervention.

Supply-Side Economics

The idea that lower taxes and less regulation boost economic growth.

Automatic Stabilizer

Policies like unemployment benefits that help stabilize the economy automatically.

Crowding-Out Effect

When government borrowing reduces private investment.

Mandatory Spending

Required government spending on programs like Social Security.

Discretionary Spending

Government spending that must be approved annually, like defense.

Laffer Curve

A graph showing the relationship between tax rates and tax revenue.

Barter

The direct exchange of goods and services without money.

$ Characteristics

Durability, portability, divisibility, uniformity, limited supply, and acceptability.

Medium of Exchange

Something accepted as payment for goods and services.

Medium of Exchange

4 Characteristics - Durable, portable, divisible, and widely accepted.

Unit of Account

A standard measure of value in the economy.

Store of Value

The ability of money to hold value over time.

Store of Value Characteristics

Stability and durability.

Fiat Money

Money that has value because the government declares it so.

Commodity Money

Money that has intrinsic value, like gold or silver.

Representative Money

Money backed by a physical asset, like gold.

Gold Standard

A system where money is backed by gold.

The Federal Reserve (The Fed)

Who Controls the U.S. Money Supply? - The Federal Reserve (the Fed).

M1

Includes cash, coins, and checking deposits (most liquid assets).

M2

Includes M1 plus savings accounts and small time deposits.

Liquidity

How easily an asset can be converted into cash.

Federal Reserve Bank

Created By? - The Federal Reserve Act of 1913.

FRB Main General Function

Regulating the money supply and banking system.

FRB Specific Functions

Controlling inflation, supervising banks, and providing financial services.

FRB Organizational Parts

Board of Governors, 12 Regional Banks, and the Federal Open Market Committee (FOMC).

Board of Governors - # of Members

Seven.

BOG Length of Term

14 years.

BOG Chairperson Serves a __-Year Term

Four years.

BOG Why Is the Term So Long?

To maintain independence and stability.

FOMC Membership

Seven governors, one Fed president, and four rotating regional bank presidents.

FOMC Role

Controlling interest rates and money supply through open market operations.

Regional Banks - # of RBs

12

RB Texas Is In The ___ District

11th.

RB Roles

Implement monetary policy, regulate banks, and provide financial services.

The Fed - "Public/Private" Means

It combines government oversight with independent financial operations.

The Fed - Why "Public/Private"?

To balance government regulation with independent decision-making.

Member Bank

A commercial bank that is part of the Federal Reserve System.

FDIC Name

Federal Deposit Insurance Corporation.

FDIC Role

Insures bank deposits up to a certain amount.

Check Clearing

The process of transferring funds between banks when checks are written.

Monetary Policy

The regulation of money supply and interest rates by the Fed.

Easy Money Policy

Increasing the money supply to stimulate the economy.

Tight Money Policy

Reducing the money supply to control inflation.

Discount Rate

The interest rate the Fed charges banks for loans.

Federal Funds Rate

The interest rate banks charge each other for overnight loans.

Fractional Reserve Banking

Banks keep only a fraction of deposits and loan out the rest.

Treasury Bills

Short-term government securities with maturities of less than a year.

Treasury Bonds

Long-term government securities with maturities over 10 years.

Treasury Notes

Government securities with maturities between 2 and 10 years.