Chapter 2 Flashcards
Fiscal policy
Govt. actions in raising revenue through taxation, govt. spending, and debt financing.
Monetary policy
Govt. action in controlling the money supply and therefore the cost of borrowing money.
The Fed’s tools for monetary policy:
1) Reserve requirements
2) Discount rate and federal funds rate target and
3) Open market operations
Federal deficit
A shortfall in funds that occurs when the federal govt. spends more money than it collects in a particular year.
Home mortgage interest deduction
Interest paid on mortgage loans secured by the taxpayer’s home or homes is deductible, up to certain limits.
Exclusion of gain on sale of home
A taxpayer may exclude from taxation any gain on the sale of a principal residence, up to a limit of $250,000 (or $500,000 if married and filing jointly). The excess is taxed at capital gains rate.
Depreciation deductions
Owners of income property are allowed to deduct the cost of assets that will wear out and eventually have to be replaced. Also called cost recovery deductions.
Federal Reserve System
Regulates commercial banks and implements the nation’s monetary policy. AKA “The Fed.”
Reserve requirements
The Fed requires commercial banks to hold a certain portion of their deposits on reserve for immediate withdrawal by depositors.
Federal Reserve Bank
There are 12, one for each Federal Reserve District, owned by the commercial banks within that district.
They:
1) propose discount rates
2) hold reserve balances for depository institutions
3) furnish currency
4) collect and clear checks and transfer funds for depository institutions and
5) handle U.S. govt. debt and cash balances
Federal Reserve Board
The Federal Reserve System is controlled by a seven-member Board of Governors, known as the Federal Reserve Board. Each of the seven members is appointed from a different district to a 14-year term.
They:
1) set reserve requirements and approve discount rates as part of monetary policy;
2) supervise and regulate member banks and bank holding companies;
3) establish and administer protective regulations in consumer finance; and
4) oversee Federal Reserve Banks
Inflation
A trend of general price increases throughout the economy.
Discount rate
The interest rate that a Federal Reserve Bank charges on short-term loans to member banks; the Fed sets this rate directly.
Federal funds rate
The interest rate that banks charge one another for overnight loans; the Fed sets a target for this rate.
Open market operations
The Fed adjusts the money supply by engaging in open market operations; as it buys and sells govt. securities, it changes the amount of money available in circulation.
Federal Open Market Committee
A board that makes decisions regarding open market operations by the Fed. Directs open market operations (buying and selling U.S. govt. securities), which are the primary instrument of monetary policy.
