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2 types of government spending
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Terms in this set (148)
2 types of government spending
purchases of goods and services and government transfers
fiscal policy that increases aggregate demand
expansionary
expansionary or contractionary policy?
An increase in gov purchases of goods and services
Expansionary
expansionary or contractionary policy?
A cut in taxes
Expansionary
expansionary or contractionary fiscal policy?
An increase in gov transfers
Expansionary
Which fiscal policy closes a recessionary gap?
Expansionary
Expansionary policy shifts the aggregate demand curve:
rightward
What gap does contractionary policy close?
inflationary
expansionary or contractionary policy?
reduced gov purchases of goods and services
contractionary
expansionary or contractionary policy?
An increase in taxes
contractionary
expansionary or contractionary policy? reduction in gov transferscontractionaryaggregate output in above potential output leads to what kind of gap?inflationarymost important fed bank?New Yorkdoes monetary or fiscal policy work faster?monetaryhow do banks create money?loansa pool of loans is assembled and shares of that pool are sold to investorssecuritizationthe use of taxes, government transfers, or government purchases of goods and services to stabilize the economy by shifting the aggregate demand curvefiscal policywho owns federal debt?people who purchase securitieswho owes federal debt?tax payersborrowed fundsleverageA financial institution engages in ____________ when it finances its investments with borrowed fundsleveragetrades in financial assets and is not covered by deposit insuranceinvestment bankaccepts deposits and is covered by deposit insurancecommercial banklending to home-buyers who don't meet the usual criteria for being able to afford their paymentssub-prime lendingcurrency in bank vaults and bank deposits held at the federal reservebank reserveshow do banks earn revenue?charging interest on loansbanks required to hold way more assets than the value of bank deposits-decreases risky behaviorcapital requirementsa medium of exchange whose value derives entirely from its official status as a means of paymentfiat moneytotal value of financial assets in the economy that are considered moneymoney supplymeans of holding purchasing power over timestore of valuethe commonly accepted measure individuals use to set prices and make economic calculationsunit of accounta good used as a medium of exchange that has intrinsic value in other usescommodity moneygovernment spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expandsautomatic stabilizersmoney multiplier1/required reserve rateloans are a ________ accountassetreserves are a ________ accountassetdeposits are a ______ accountliability4 main features of bank regulationdeposit insurance, capital requirements, reserve requirements, and discount windowrules set by the federal reserve that determine the min reserve ration for banksreserve requirementsexcess of a bank's assets over its bank deposits and other liabilitiesbank capitalare bank reserves part of the currency in circulation?NOPrimary source of revenue for fed governmentincome taxeswhat is the most often used of the monetary policies?open-market operationsbank reserves are part of the ______ _________monetary basecheckable bank deposits are part of the ______ _____money supplywhat is the most important role of the federal reserve?monetary policyamount of tax a household owes is independent of its incomelump-sum taxeshow do lump-sum taxes effect the multiplier?they don'ta medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goodsCommodity-backed moneybank accounts on which people can write checks (considered money)checkable bank depositsthe reduction in a firm's net worth due to falling asset pricesBalance sheet effectfederal reserve buys or sells US treasury bills through a transaction with commercial banksOpen-market operationthe fed stands ready to lend money to banks in troublediscount windowinterest rate that banks charge their best customersprime rateFOMCfederal open market committeethe result of deliberate actions by policy makers rather than rules; usually only in special circumstances like a severe recession (ex. Gov passes legislation to cut taxes and increase gove spending to stimulate the economy)discretionary fiscal policybudget deficit almost always ________ when the unemployment rate risesrisesbudget deficit almost always ______ when the employment rate fallsfallsGold, silver, and cigarettes are an example of ______commodity money3 roles of moneymedium of exchange, store of value, and unit of accountestimate of what the budget balance would be if real GDP were exactly equal to potential output -doesn't fluctuate as much as the actual budget deficitcyclically adjusted budget balanceare bank reserves part of currency in circulation?nomonetary base equationbank reserves + currency in circulationmonetary basethe sum of currency in circulation and reserves held by banksfederal minimum reserve requirement10%the rate of interest the fed charges on loans to banksdiscount rateloaned funds held by borrowers (increase/decrease) money multiplier size?decreaseincreases monetary base and therefore the money supplyopen market purchase of treasury billswho banks with commercial banksthe public______ creates a demand for foreign currencyimports_________ creates a supply of foreign currencyexportsunemployment benefits are an example of whatautomatic stabilizersaccumulation of all deficits and surpluses over time; what we owedebtwho is the chairman of the federal reserve?ben bernankewhat did the panic of 1907 result infederal reserveInterest rate of alternative financial asset you could have put your money intoopportunity cost of holding moneywhat happens if fed increases reserve rate?fall in money supplywhat happens if fed reduces reserve requirements?more loans, increase in money supplywhat is larger- monetary base or money supply?money supplywithout banks the quantity of currency in circulation would equalmoney supplyallows banks that fall short of the reserve requirement to borrow funds from banks with excess reservefederal funds marketwhat is the equilibrium in the money market?federal funds interest rate______ pay a slightly lower interest rate than other short-term assets in normal timestreasury billswhat kind of changes cause the money demand curve to shift?aggregate price level real GDP (income) technology institutionsa rise in money demand shifts the money demand curverightshows how the nominal quantity of money supplied varies with the interest ratemoney supply curveincrease in money supply leads to (rise/fall) in interest ratefallthe federal reserve's desired federal funds ratethe target federal funds ratean open-market purchase drives the interest rate (up/down) and the money supply curve (left/right)down; rightan open market sale drives the interest rate (up/down) and the money supply curve (left/right)up;leftbanks prefer to borrow fromother bankswhat monetary policy tool is used the least often?reserve requirementsexpansionary or contractionary monetary policy? buy treasury securitiesexpansionaryexpansionary or contractionary monetary policy? increase required reserve ratiocontractionaryexpansionary or contractionary monetary policy? raise fed funds ratecontractionaryexpansionary or contractionary monetary policy? lower discount rateexpansionarywhich monetary policy is easier for the fed?contractionaryUnemployment has been rising and output has declined over the past six months. Which of the following is an appropriate monetary policy for the FOMC to pursue? Sell treasuries Increase government spending Buy treasuries Increase the Fed Funds ratebuy treasuriesOver the past year the economy has faced unexpected rapidly increasing prices because of too much spending. Which of the following is an appropriate monetary policy for the FOMC to pursue? Increase the Fed Funds rate Decrease government spending Buy treasuries Decrease the Fed Funds rateincrease the fed funds rateoccurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target.inflation targetingfiscal policy works through the _____ __________budget balanceactual GDP < potential GDPrecessiontotal production in economy depends on productivity, tech, cost of resourcesSRASdepends on potential GDP, full employment, level of outputLRASchange in real GDP =spending multiplier x change in spendingAn economy that trades goods and services with other countries.open economyWhat is a trade surplus? G < T X > M X < M T < Gx > mWhat is a trade deficit? G < T X > M X < M T < Gx<mis the difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period.financial accountAll payments related to the purchase or sale of goods & services and income flows during the current periodcurrent accountcurrent or financial account? Merchandise imports and exportscurrentcurrent or financial account? service imports and exportscurrentcurrent or financial account? income from investmentscurrentcurrent or financial account? foreign aidcurrentA country's balance of payments on financial account, or simply its financial account, is the difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period.financial accountsum of the balance of payments on current account plus the balance of payments on financial account is0it is preferable for a gov to run a (surplus/deficit) because of lower borrowing costsdeficitat which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied.equilibrium exchange rateincrease in demand for US dollar leads to (appreciation/depreciation) of the dollarappreciationUsually implemented because country has unsophisticated financial capital markets and weak regulatory institutionsfixed exchange ratesstrong currencyappreciationweak currencydepreciationA global electronic network of banks and financial institutions exchanging currency.foreign exchange marketAllows exchange rates to fluctuate as economic conditions dictate Exchange rate is a function of the demand for a currency relative to its supplyflexible exchange ratereduction in the value of a currency that previously had a fixed exchange rate.devaluationincrease in the value of a currency that previously had a fixed exchange rate.revaluationoccurs when the real GDP is low relative to the potential real GDPrecessionary gapwhen the gov receives more in taxes than it spends in a given time periodbudget surpluswhen the gov spends more than it collects in taxes in a given time periodbudget deficitwhen the gov spending and taxes are equalbudget balanceautomatic stabilizers cause tax revenue to (rise/fall)fallautomatic stabilizers decrease/increase government spendingincreasefresh fish is not an effective form of money. what essential characteristic of money does fresh fish lack that makes it ineffective? medium of exchange store of value unit of account stackabilitystore of valuewhat essential characteristic of money does cattle lack that makes it most ineffective?medium of exchangerank from largest to smallest in terms of $ value M1 M2 travelers checks currency balances in savings accountsm2 balances in savings accounts m1 currency travelers checksare credit cards money?nois gold money?noincreasing the reserve ratio will ____ the money multiplierdecreasean Italian buys a hotel room for a vacation in spain current or financial?currentcurrent or financial? Spanish company buys irish IT companyfinancialSpanish company buys Iranian oil current or financial?currentcurrent or financial? profits of a US company operating in spain current or financial?currentincrease in offshore labor outsourcing will cause existing trade deficit toincreaseincrease or decrease trade deficit? domestic investment increases faster than savingsincreaseincrease or decrease trade deficit? increase in the domestic consumption of foreign goodsincreaseincrease or decrease trade deficit? domestic consumer saving increasesdecreaseincrease or decrease trade deficit? increase in domestic taxes collecteddecreaseforeign exchange controls are policies that limit the rights ofindividuals to buy foreign currency