Chapter 17 Flashcards
Fiscal Policy
the set of a government’s policies relating to its expenditure and taxation rates
Goals of Fiscal Policy
- keeping a low and stable rate of inflation
- low unemployment rate
- stable economic environment for long-term growth
- reduce fluctuations in the business cycle
- achieve balance between with net exports
Expansionary Fiscal Policy
(Keynesian) policies used to increase AD
- “trade-off’ between lower unemployment and higher inflation
- effective at dealing with a deep recession
Contractionary Fiscal Policy
(Keynesian) policies used to decrease AD
Keynesian Multiplier
a value to represent the multiplied effect of how a government investment benefits the economy
Monetary Policy
the set of official policies governing the supply of money and the level of interest rates in an economy
Goals of Monetary Policy
- keeping a low and stable rate of inflation
- low unemployment rate
- stable economic environment for long-term growth
- reduce fluctuations in the business cycle
- achieve balance between with net exports
Expansionary Monetary Policy
used to increase AD
- when the base rate is lowered, AD increases
- “trade-off” between lower unemployment and higher inflation
Contractionary Monetary Policy
used to decrease AD
Nominal Interest Rate
the rate of interest available in the money market, not allowing for inflation
Real Interest Rate
the rate of interest adjusted for inflation
Capital Expenditures
includes any spending that adds to the capital stock of the economy (infrastructural)
Current Expenditures
ongoing spending such as the purchases of textbooks in schools or the payment of wages to public sector employees
Transfer Payments
include any benefits paid to people in
the economy for which no goods and services are produced in return (unemployment benefits, child support)
Time-Lags
a period of time between when a policy is implemented and when its effects can be seen
Expansionary Fiscal Policy Effect on Net Exports
- increase in demand
- increase in interest rates
- exchange rate becomes higher
- exports seem less attractive to foreign countries
- imports also become more attractive
- lead to a fall in net exports (X-M)
Crowding Out
theory that argues that rising public sector spending drives down or even eliminates private sector investment
National Debt
the accumulation of all the budget deficits over the years and shows the amount of money that the government owes
Debt Servicing Costs
the amount of money needed to make payments on the interest of a loan in a given time period
Injections
government spending, investment, ___
Withdrawals
government taxes, saving, spending on imports
Marginal Propensity to Consume (MPC)
the percent of additional income spent on goods and services
Base Rate
the interest rate set by the central bank
Central Bank
the ultimate authority in control of the money supply in an economy
Inflation Targeting
when the central bank sets a target inflation rate as a goal
Credit Creation
the process of how the money supply of an economy is increased
Minimum Reserve Requirement
the percentage of deposits that commercial banks are legally required to hold in reserve by the central bank
Money Multiplier
. 1
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minimum reserve requirement
Quantitive Easing
the introduction of new money into the economy by the central bank to increase AD
Discount Rate
the interest rate that the central bank charges to commercial banks
