Fiscal and Monetary Policy

Question 1

Federal Funds Rate

Answer 1

Interest rate which one bank lends funds to another bank overnight

Question 2

Money Supply

Answer 2

Tool which the Federal Reserve makes policy

Question 3

Quantity of Money

Answer 3

Affects the supply curve in the market for loanable funds, affecting the interest rate in the market

Question 4

Target Interest Rate

Answer 4

Federal Funds Rate

Question 5

Expansionary Money Policy

Answer 5

Policy that increase the supply of money and the quantity of loans: also called “loose” monetary policy

Question 6

Effects of Expansionary Monetary Policy

Answer 6

Decreases federal funds rate

Question 7

Contractionary Monetary Policy

Answer 7

Policy that decreases the supply of money and the quantity of loans; also called “tight” monetary policy

Question 8

Effects of Contractionary Policy

Answer 8

Increase in the federal funds rate

Question 9

Overall Thoughts on the Federal Reserve

Answer 9

Announces a target for the federal funds rate, then uses open market operations to affect the money supply such that the effective federal funds rate matches the target

Question 10

Discount Rate

Answer 10

Interest Rate the Fed charges when lending to banks

Question 11

Effective Federal Funds Rate

Answer 11

Determined by market forces

Question 12

Tight/Contractionary Policy

Answer 12

Fewer Loanable Funds - Higher Interest Rate

Question 13

Felt Effects of Tight Monetary Policy

Answer 13

Business investment will decline; less attractive to borrow money and the opportunity cost of investing are higher
Financing of large consumer purchases becomes more expensive with higher interest, encouraging such purchases

Question 14

Felt Effects of Loose/Expansionary Policy

Answer 14

Business investment will increase; more attractive to borrow money and the opportunity cost of investing are lower.
Financing of large consumer purchases becomes less expensive with lower interest, discouraging such purchases

Question 15

Velocity

Answer 15

Describes how quickly money circulates through the economy - higher velocity means that the average dollar circulates more times in a year

Question 16

Excess Reserves

Answer 16

Banks are hesitant to lend, and expansionary monetary policy may not work as well

Question 17

Velocity

Answer 17

Nominal GDP/Money Supply

Question 18

Basic Quantity Equation - Money

Answer 18

Money Supply x Velocity = Nominal GDP

Question 19

Inflation- Targeting

Answer 19

A rule that the central bank is required to focus only on keeping inflation low

Question 20

Political Influence

Answer 20

Central Banks public elections can lead to expansionary monetary policy and high unemployment

Question 21

Budget Surplus

Answer 21

When the government receives more in taxes than it spends in a year

Question 22

Budget Deficit

Answer 22

When the government spends more than it collects in taxes in a given year

Question 23

Balanced Budget

Answer 23

When government spending and taxes are equal

Question 24

Taxation

Answer 24

Individual Income Tax, Corporate Income Tax, Payroll Tax

Question 25

Progressive/Regressive Tax

Answer 25

A tax that collects greater//smaller share of income from those with higher income that those with lower income

Question 26

Proportional (Flat) Tax

Answer 26

Tax as a flat percentage of income earned, regardless of level of income

Question 27

Government Debt

Answer 27

The total accumulated amount that the government has borrowed and not yet paid back over time

Question 28

Fiscal Policy

Answer 28

Economic Policies that involve government spending and taxes

Question 29

Expansionary Fiscal Policy

Answer 29

When fiscal policy increases the level of government spending (G) and thus increases the level of aggregate demand, either through increases in government spending or cuts in taxes

Question 30

Contractionary Fiscal Policy

Answer 30

When fiscal policy decreases the level of government spending (G) and thus decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

Question 31

Discretionary Fiscal Policy

Answer 31

When the government passes a new law that explicitly changes overall tax or spending levels

Question 32

Automatic Stabilizers

Answer 32

Tax and spending rules that have the effect of increasing aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

Question 33

Answer all questions at the end mid point in slides and at the end of the slides

Answer 33

Answered them yet?