ECONOMICSMR. BORDELON

Fiscal and Monetary PolicyReview

Key Terms

Policy used to increase overall demand and GDP.

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Policy used to increase overall demand and GDP. Expansionary fiscal policy

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Theory that states that the economy regulates itself.

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Theory that states that the economy regulates itself. Classical economic theory

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Long-term bond, issued sometimes for as long as 30 years.

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Long-term bond, issued sometimes for as long as 30 years. Treasury bond

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Occurs when government has money left over after paying all of its expenses for the year.

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Occurs when government has money left over after paying all of its expenses for the year. Budget surplus

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Government’s use of taxing and spending and transfers to affect overall economy.

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Government’s use of taxing and spending and transfers to affect overall economy. Fiscal policy

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Rate Federal Reserve charges for loans to commercial banks.

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Rate Federal Reserve charges for loans to commercial banks. Discount rate

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Process by which money enters into circulation.

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Process by which money enters into circulation. Money creation

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Seven-member board that oversees Federal Reserve System.

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Seven-member board that oversees Federal Reserve System. Board of Governors

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Monetary policy that reduces the money supply.

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Monetary policy that reduces the money supply. Contractionary monetary policy

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Reserves greater than the required amounts.

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Reserves greater than the required amounts. Excess reserves

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Process by which banks record whose account gives up money and whose account receives money when a customer writes a check.

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Process by which banks record whose account gives up money and whose account receives money when a customer writes a check. Check clearing

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federal funds rateFederal Reserve Districtprime ratebudget deficitsautomatic stabilizersbalanced budget

Main Ideas

Name and describe limits of fiscal policy.

Main Ideas

Name and describe limits of fiscal policy. Policy lag Political pressure Predicting future economic activity (time lag)

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Describe the multiplier effect.

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Describe the multiplier effect. Effects of fiscal policy are multiplied in the market.

Every dollar of change in fiscal policy translates into more than a dollar of change in overall national income.

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What is national debt?

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What is national debt? National debt is sum of government borrowing.

Measured sometimes by comapring it to GDP (debt calculated as a percentage of GDP).

Main Idea

What is the difference between the national debt and budget deficit?

Main Idea

What is the difference between the national debt and budget deficit? National debt is all of the money that federal

government owes. Deficit is the amount of money government borrows for one fiscal year.

Main Ideas

What options does the government have to respond to a budget deficit (think fiscal policy tools)?

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What options does the government have to respond to a inflationary gap (think fiscal policy tools)? Increase taxes Decrease spending Decrease transfers

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Name services the Federal Reserve offers banks.

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Name services the Federal Reserve offers banks. check clearing supervising lending practices lender of last resort

What about the gov’t?

Main Ideas

What is the money multiplier formula?

Main Ideas

What is the money multiplier formula? 1/rrr

Critical Thinking

What’s the difference between classical and Keynesian economics?

Critical Thinking

What’s the difference between classical and Keynesian economics? Classical economics focuses on self-regulation of the

free market. Keynesian economics supports government

interaction within the market.

Critical Thinking

How do automatic stabilizers affect the U.S. economy?

Critical Thinking

How do automatic stabilizers affect the U.S. economy? Automatic stabilizers try to keep recessions and

inflation from having such a large impact on the economy. Without them, the economy could end up with depression or hyperinflation.

Critical Thinking

What is the crowding-out effect, and how can it influence economic growth?

Critical Thinking

What is the crowding-out effect, and how can it influence economic growth? When governments borrow money, there is less money

available to invest in businesses. If people do not invest in businesses, economic growth slows down.

Critical Thinking

Why do you think open-market operations are the most commonly used monetary policy tool?

Critical Thinking

Why do you think open-market operations are the most commonly used monetary policy tool? Open market operations have an almost immediate

effect on the money supply, which is more advantageous than dealing with the required reserve or discount/federal funds rates because they can take longer.