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Fiscal Policy

The use of government spending and taxes to influence the nation's spending, employment, and price level.

Discretionary Fiscal Policy

The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.

Spending Multiplier

The change in aggregate demand(total spending) resulting from an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports.
SM= 1/(1-MPC) or 1/(MPS)

Expansionary Fiscal Policy

-Increase government spending
-Decrease taxes
-Increase government spending and taxes equally

Contractionary Fiscal Policy

-Decrease government spending
-Increase taxes
-Decrease government spending and taxes equally

Marginal Propensity to Consume(MPC)

the change in consumption spending resulting from a given change in income
MPC=change in consumption spending/change in income

Marginal Propensity to Save(MPS)

The change in saving resulting from a given change in income

Tax Multiplier

The change in aggregate demand(total spending) resulting from an initial change in taxes.
(1-spending multiplier)=TM

Balanced Budget Multiplier

An equal change in gov spending and taxes, which changes aggregate demand by the amount of the change in government spending
^ AD=(^Gov x m)+(^T x tm)
BBM=1(always)

Automatic Stabilizers

Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes refereed to as non discretionary fiscal policy

Budget Surplus

A budget in which government revenues exceed government expenditures in a given time period

Budget Deficit

A budget in which government expenditures exceed government revenues in a given time period

Supply-side Fiscal Policy

A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level.

Laffer Curve

A graph depicting the relationship between tax rates and total tax revenues

Barter

The direct exchange of one good or service for another good or service, rather than for money

Money

Anything that serves as a medium of exchange, unit of account, and store of value.

Medium of exchange

The primary function of money to be widely accepted in exchange for goods and services

Unit of account

The function of money to provide a common measurement of the relative value of goods and services

Store Value

The ability of money to hold value over time

Commodity money

Anything that serves as money while having market value in other uses.

Fiat Money

Money accepted by law and not because of its redeemability or intrinsic value

M1

The narrowest definition of the money supply. It includes currency and checkable deposits

Currency

Money, including coins and paper money

Checkable deposits

The total of checking account balances in financial institutions convertible to currency "on demand" when a check is written without advance notice

M2

The definition of money supply that equals M1 plus near monies, such as savings deposits and small time deposits of less than 100,000.

Federal Reserve System

The 12 Central banks that service banks and other financial institutions within each of the Federal Reserve districts; popularly called the fed.

Board of Governors of the Federal Reserve System

The seven members appointed by the president and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term. Their responsibility is to supervise and control the money supply and the banking system of the United States

Federal Open Market Committee(FOMC)

The Federal Reserve's committee that directs the buying and selling of the US government securities, which are major instruments for controlling the money supply. The FOMC consists of the seven members of the Federal Reserve's Board of Governors, the president of the NY federal reserve bank, and the presidents of four other federal reserve district banks.

Federal Deposit Insurance Corporation(FDIC)

A government agency established in 1933 to insure commercial bank deposits up to a specified limit

Monetary Control Act

A law, formally titled the Depository Institutions Deregulation and Monetary Control Act of 1980, that gave the Federal Reserve System greater control over nonmember banks and made all financial institutions more competitive

Fractional Reserve banking

A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposit at the Fed.

Required Reserves

The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed

Required Reserve Ratio

The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed

Excess Reserves

Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves

Money Multiplier

The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold.
MM=1/required reserve ratio=1/(1/10)=10

Actual Money Supply change

=initial change in excess reserves(ER) X Money Multiplier(MM)

Monetary Policy

The Federal Reserve's use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1)

Open Market Operations

the buying and selling of government securities by the Federal Reserve System

Discount Rate

The interest rate the Fed charges on loans of reserves to banks

Federal Funds market

A private market in which banks lend reserves to each other for less than 24 hours

Federal Funds rate

The interest rate banks charge for overnight loans of reserves to other banks

Transactions demand for money

The stock of money people hold to pay everyday predictable expenses

Precautionary demand for money

The stock of money people hold to pay unpredictable expenses

Speculative demand for money

The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other non money financial assets

Demand for Money Curve

A curve representing the quantity of money that people hold at different possible interest rates, ceteris paribus

Monetarism

The Theory that changes in the money supply directly determine changes in prices, real GDP, and employment

Equation of exchange

An accounting identity that states the money supply times the velocity of money equals total spending
MV=PQ(nominal GDP)

Velocity of Money

The average number of times per year a dollar of the money supply is spent on final goods and services

Quantity theory of money

The theory that changes in the money supply are directly related to changes in the price level

Subprime Mortgage loan

A home loan made to borrowers with an above average risk of default

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