Monetary and Fiscal Policy Vocabulary Review

Monetary Policy Tools

  • Types of Monetary Tools:

    • Open market operations

    • Changing the reserve requirement

    • Adjusting the discount rate

    • NOT a Tool: Increasing government spending

Fiscal Policy Goals

  • Primary goal of expansionary fiscal policy:

    • To stimulate economic growth

    • Other options:

    • To slow economic growth

    • To reduce inflation

    • To balance the budget

Implementation of Monetary Policy

  • Implementing Entity in the U.S.:

    • The Federal Reserve

  • Other entities:

    • The President

    • Congress

    • The Treasury Department

Effects of Interest Rate Changes

  • Lowering interest rates:

    • Increases borrowing

    • Decreases saving

    • Effects on the economy:

    • Reduced inflation

Examples of Fiscal Policy

  • Contractionary fiscal policy example:

    • Increasing taxes

    • Other options:

    • Increasing government spending

    • Lowering taxes

    • Expanding social welfare programs

Federal Funds Rate

  • What Federal Funds Rate affects:

    • Applies to bank-to-bank loans

    • Incorrect impacts specified:

    • Setting mortgage rates

    • Direct inflation control

    • Determining government bond yields

Federal Reserve and Government Bonds

  • Effect of Federal Reserve buying government bonds in the open market:

    • Increases the money supply

Limitations of Fiscal Policy

  • Limitations:

    • It can be very slow

    • Not subject to political pressures

    • NOT limitations:

    • It can be implemented quickly

    • Direct control over the money supply

Federal Budget Spending

  • Primary difference between discretionary and mandatory spending:

    • Discretionary spending is determined annually, while mandatory spending is required by law

  • Examples:

    • Discretionary: Funding for defense

    • Mandatory: Funding for social programs

Contractionary Monetary Policy Triggers

  • Triggers for contractionary monetary policy:

    • Very high employment

    • Low interest rates

    • Rising inflation

    • NOT triggers:

    • High unemployment rates

    • Low inflation rates

    • Stock market crash

Impact of Reserve Requirements on Money Supply

  • Effect of increasing reserve requirement for banks:

    • Decreases the money supply

Goals of Federal Reserve Monetary Policy

  • Primary goal:

    • To promote maximum employment, stable prices, and moderate long-term interest rates

  • Incorrect goals listed:

    • Maximizing government revenue

    • Eliminating the national debt

    • Ensuring a trade surplus

Advantages of Monetary vs. Fiscal Policy

  • Advantages of monetary policy:

    • Can be implemented more quickly

    • More predictable impact on the economy

    • Ability to target specific sectors of the economy

    • NOT advantages:

    • More politically popular

Automatic Stabilizers in Fiscal Policy

  • Examples of automatic stabilizers:

    • Unemployment insurance

    • NOT examples:

    • A one-time tax rebate

    • A government stimulus package

    • An increase in the money supply

Federal Reserve Banks

  • Number of Federal Reserve Banks:

    • 12

  • Closest Federal Reserve Bank:

    • Located in Atlanta, New York, Boston, Portsmouth

Appointment Process for Federal Reserve Chair

  • How the Federal Reserve Chair is appointed:

    • Nominated by the President

Fiscal Policy Responsibility

  • Entity responsible for fiscal policy:

    • The Government

    • NOT responsible:

    • The Federal Reserve

    • All banks combined

    • The Treasury

Roles of Fiscal Policy

  • Role NOT included in fiscal policy:

    • Money creation

Federal Reserve Creation Date

  • Created in:

    • 1913

    • Other dates listed:

    • 1814

    • 1865

    • 1945

Income Tax Terminology

  • Definitions of key tax terms:

    • Income Tax: Tax levied by a government directly on individual income.

    • Tax Deductions: Reductions in taxable income for specific expenses incurred.

    • Tax Exemptions: Amounts that taxpayers can subtract for themselves or dependents to reduce taxable income.

    • Taxable Income: The amount of income used to calculate tax due after all deductions and exemptions.

    • I-9 Form: Used by employers to verify the identity and employment authorization of individuals hired for work in the U.S.

    • W-4 Form: Completed by employees to let employers know how much tax to withhold from their paycheck.

    • W-2 Form: A statement of the total taxes withheld from a person's pay for the year.

    • Adjusted Gross Income (AGI): Total gross income minus specific adjustments allowed by the IRS.

    • Tax Brackets: The divisions at which tax rates change in a progressive tax system.

    • Tax Rate: The percentage at which an individual or corporation is taxed.

    • Standard Deduction: A fixed dollar amount that reduces the amount of income on which you are taxed.

    • Child Tax Credit: A credit given to taxpayers for each qualifying dependent child.

    • Form 1040: The standard Internal Revenue Service (IRS) form used by individuals to file their annual income tax returns.

    • Wages: Payments for services rendered, usually on an hourly or daily basis.

    • Tips: Gratuities earned by workers in certain service industries.

    • Dependents: A person, such as a child, who relies on another for financial support.

    • Education Credits: Tax credits derived from educational expenses to reduce the amount of tax owed.

    • Earned Income Credit: A refundable tax credit for low-to-moderate-income working individuals and couples.

    • Tax Refund: The difference between taxes paid and the actual tax owed, returned to the taxpayer.

    • Tax Owed: The total amount of tax liability an individual has to the government.

    • Electronic Tax Filing: The process of submitting tax returns through the internet using tax preparation software.

    • Filing Status: A category that defines the type of tax return form a user must use (e.g.e.g. Single, Married Filing Jointly).

    • Charitable Contributions: Money or goods given to a registered charity, which can be deducted from taxable income.

Investing Vocabulary

  • Key terms and definitions in investing:

    • Income Investments: Investments specifically designed to provide regular cash flow, such as dividends or interest.

    • Growth Investments: Assets like stocks or real estate expected to increase in value over time.

    • Bonds: A debt security where the investor lends money to an entity (governmentorcorporategovernmentorcorporate) for a period at a fixed interest rate.

    • Stocks: Securities that represent ownership in a fraction of a corporation.

    • ETFs (Exchange-Traded Funds): A type of pooled investment security that operates much like a mutual fund but trades on an exchange.

    • Government Bonds: Debt instruments issued by a national government to support government spending.

    • Municipal Bonds: Bonds issued by local governments or territories (states,citiesstates,cities) to fund public projects.

    • Corporate Bonds: Debt securities issued by a company to raise capital for business expansion or projects.

    • Stock Broker: A financial professional who executes buy and sell orders for stocks on behalf of investors.

    • Stock Exchanges: Infrastructure where equity trading takes place (e.g.NYSE,NASDAQe.g.NYSE,NASDAQ).

    • Assets: Resources with economic value that an individual or company owns or controls.

    • Liquid Assets: Cash on hand or assets that can be readily converted to cash without losing value.

    • Return on Investment (ROI): A ratio between net profit and cost of investment (ROI=Net ProfitCost of Investment×100ROI=Cost of InvestmentNet Profit​×100).

    • Rate of Return (ROR): The net gain or loss of an investment over a specified period, typically expressed as a percentage of the investment's initial cost.

    • Maturity Date: The final payment date of a loan or other financial instrument, at which point the principal is due.

    • Stock Shareholder: Any person, company, or institution that owns at least one share of a company's stock.

    • Securities: Tradable financial assets such as equities, bonds, or derivatives.

    • Stock Bid Price: The highest price a buyer is willing to pay for a stock.

    • Stock Ask Price: The lowest price a seller is willing to accept for a stock.

    • Stock Dividend: A dividend payment made in the form of additional shares rather than cash.

    • Investment Advisor: A person or firm that provides professional advice on managing investments.

    • Money: Anything that is generally accepted as a medium of exchange, a store of value, and a unit of account.

    • Currency: A specific type of money used within a particular country or region.

    • Risk: The uncertainty regarding the actual return an investment will provide.

    • Dividends: Distributions of a company's earnings to its shareholders.

General Financial Calculations: Key Terms

  • Budget and Financial Literacy Vocabulary:

    • Budget: A plan for spending and saving money over a specific period of time.

    • Federal Withholding Tax: Tax money held back from an employee's paycheck and sent to the federal government.

    • FICA Taxes: Taxes that fund Social Security and Medicare programs.

    • Gross Earnings: Total amount of money earned before any taxes or deductions are taken out.

    • Net Pay: The amount of money you actually receive in your paycheck after all deductions (take−homepaytake−homepay).

    • Interest: The fee paid for the use of borrowed money, or money earned on savings.

    • Principal Amount of Loan: The original sum of money borrowed, separate from interest.

    • Equity: The difference between the market value of an asset and the amount owed on it.

    • Balance Due: The remaining total of a debt that must be paid.

    • Interest Rate: The percentage charged on the principal by a lender for the use of its money.

    • Loan Terms: The rules and requirements governing a loan, including the repayment period.

    • Monthly Payment: The specific amount of money paid each month toward a debt.

    • Total Loan Repayment Amount: The total sum of the principal and all interest paid over the life of a loan.

    • Financing: Providing or obtaining funds for business activities, purchases, or investments.

    • Credit: An arrangement to receive goods or services now and pay for them in the future.

    • Debit: An entry recording an amount owed or taken out of an account.

    • Credit Score (FICO): A number ranging from 300300 to 850850 that represents a person's creditworthiness.

    • Credit Rating Agency: A company that assesses the credit risk of prospective debtors.

    • Fixed Expense: An expense that remains the same from month to month (e.g.rente.g.rent).

    • Variable Expense: An expense that changes in cost depending on usage (e.g.electricitye.g.electricity).

    • Periodic Expense: Costs that occur irregularly throughout the year (e.g.carregistratione.g.carregistration).

    • Liabilities: Financial debts or obligations owed to others.

    • Annual Percentage Rate (APR): The yearly interest rate charged on borrowed money or earned on an investment.

Basic Personal Finance Vocabulary Concepts Definitions

  • Supply: The total amount of a specific good or service available to consumers.

  • Demand: The desire of consumers for a particular commodity or service.

  • Incentives: Factors that motivate a person to act or exert effort.

  • Scarcity: The basic economic problem that arises because people have unlimited wants but resources are limited.

  • Opportunity Cost: The value of the next best alternative that is given up when making a choice.

  • Wants: Things that are desired but not essential for survival.

  • Needs: Things required for survival, such as food, water, and shelter.

  • Goods: Physical objects that can be purchased, such as clothes or electronics.

  • Services: Actions or tasks performed by one person for another, like medical care or tutoring.

  • Market: Any setting where buyers and sellers exchange goods and services.

  • Resources: The materials, money, and labor used to produce goods and services.

  • Productivity: The measure of how efficiently goods and services are produced.

  • Surplus: A situation where quantity supplied is greater than quantity demanded.

  • Shortage: A situation where quantity demanded is greater than quantity supplied.

  • Revenues: The total income generated from the sale of goods or services.

  • Expenses: The costs incurred to produce or purchase goods and services.

  • Profit: Remaining money after all expenses and taxes have been paid (Profit=Revenues−ExpensesProfit=Revenues−Expenses).

  • Wages: Money paid by an employer to an employee for work done, often based on hours.

  • Income: Money received on a regular basis for work or from investments.

  • Debt: Money that is owed to someone else.

  • Wealth: The total value of all assets owned minus all debts.

  • Inflation: The rate at which the general level of prices for goods and services is rising.

  • Cost-Benefit Analysis: A process used to measure the benefits of a decision or taking action minus the costs associated with it.