Fiscal, Debt, Policy

Question 1

Recessionary Gap

Answer 1

a situation wherein the real GDP is lower than the potential GDP at full employment

Question 2

Inflationary Gap

Answer 2

The amount by which the actual GDP exceeds potential GDP at full-employment

Question 3

Fiscal Policy

Answer 3

a government adjusting its spending levels and tax rates to influence the economy

Question 4

Expansionary Fiscal Policy

Answer 4

government stimulation of the economy to alleviate contractions (like increasing spending or cutting taxes)

Question 5

Contractionary Fiscal Policy

Answer 5

enacted by the government to reduce the money supply & spending

Question 6

John Maynard Keynes

Answer 6

In reaction to lassaiz faire ideas, John Keynes prescribed using government spending in order to save the economy from itself

Question 7

Deficit Spending

Answer 7

the government spending more money than it collects in tax revenue

Question 8

Crowding out

Answer 8

when deficit spending drives down private spending. Either because it replaces them, or because the increase in taxes discourages them

Question 9

Keynesian Crowding out rebuttal

Answer 9

when the economy is below full production capacity, government spending takes the place of what private spending used to do

Question 10

Austerity

Answer 10

Raising taxes and cutting government spending to reduce debt

Question 11

Multiplier Effect

Answer 11

the government giving 100$ to someone who spends 50$ on someone who spends 25$

this means that the worth of the wealth has increased 175% through economic transactions

Question 12

fiscal spending that doesn’t multiply

Answer 12

• when the economy is expanding

- cutting in taxes

Question 13

Budget deficit

Answer 13

the amount a government’s spending exceeds its income over a certain amount of time

Question 14

DEBT

Answer 14

the accumulation of budget deficits

Question 15

how does the government alleviate debt?

Answer 15

borrowing from lender savings with interest

Question 16

Default

Answer 16

a government is unable to pay back lenders at a high interest rate, who lose billions, causing the government to lose credibility and go into recession

Question 17

The role of Central Banks

Answer 17

• regulate commercial banks to avoid bank runs

- alter policy to increase or decrease the money supply

Question 18

Interest Rate

Answer 18

the price of borrowing money

Question 19

Principle

Answer 19

the amount of money borrowed

Question 20

increasing money supply (expansionary)

Answer 20

therefore increases the amount of money banks can loan, meaning the economy spends more

Question 21

decreasing money supply (contractionary)

Answer 21

banks have less money to loan, so they increase interest rates, the economy spends less

Question 22

Liquid Assets

Answer 22

an asset that can be converted to cash quickly with minimal impact to the price received

Question 23

fractional reserve banking

Answer 23

banking by loaning a fraction of someones deposits

Question 24

reserve requirement

Answer 24

the federal* requirement for how much banks are to save in reserves

*different for different countries

Question 25

federally

increasing & decreasing reserve requirement

Answer 25

increasing: a larger fraction of money is reserved. spending decreases
decreasing: less money is reserved. spending increases

Question 26

Discount Rate

Answer 26

the interest rate that the feds charge banks that borrow from them

Question 27

decreasing and increasing the Discount Rate

Answer 27

decreasing: banks borrow easier, spending increases
increasing: banks borrow shyer, spending decreases

Question 28

Open Market Operations

Answer 28

This is when the federal reserve buys or sells short term government bonds

Question 29

treasury bill (government bond)

Answer 29

a fiscal “I owe you” that earns interest

Question 30

Federal selling & buying of bonds

Answer 30

Selling: banks lose liquidity & ability to loan, decreasing money supply

Buying: banks gain liquidity & ability to loan, increasing money supply

Question 31

(Q.E.) Quantitative Easing

Answer 31

federal (central) banks buy long term assets from banks

Question 32

Excess Reserve

Answer 32

the 90% of a bank’s reserve that they are free to loan out

Question 33

Fiscal Policy

Answer 33

changing government spending or taxes