Fiscal, Debt, Policy Flashcards
Recessionary Gap
a situation wherein the real GDP is lower than the potential GDP at full employment
Inflationary Gap
The amount by which the actual GDP exceeds potential GDP at full-employment
Fiscal Policy
a government adjusting its spending levels and tax rates to influence the economy
Expansionary Fiscal Policy
government stimulation of the economy to alleviate contractions (like increasing spending or cutting taxes)
Contractionary Fiscal Policy
enacted by the government to reduce the money supply & spending
John Maynard Keynes
In reaction to lassaiz faire ideas, John Keynes prescribed using government spending in order to save the economy from itself
Deficit Spending
the government spending more money than it collects in tax revenue
Crowding out
when deficit spending drives down private spending. Either because it replaces them, or because the increase in taxes discourages them
Keynesian Crowding out rebuttal
when the economy is below full production capacity, government spending takes the place of what private spending used to do
Austerity
Raising taxes and cutting government spending to reduce debt
Multiplier Effect
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
fiscal spending that doesn’t multiply
- when the economy is expanding
- cutting in taxes
Budget deficit
the amount a government’s spending exceeds its income over a certain amount of time
DEBT
the accumulation of budget deficits
how does the government alleviate debt?
borrowing from lender savings with interest
Default
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
The role of Central Banks
- regulate commercial banks to avoid bank runs
- alter policy to increase or decrease the money supply
Interest Rate
the price of borrowing money
Principle
the amount of money borrowed
increasing money supply (expansionary)
therefore increases the amount of money banks can loan, meaning the economy spends more
decreasing money supply (contractionary)
banks have less money to loan, so they increase interest rates, the economy spends less
Liquid Assets
an asset that can be converted to cash quickly with minimal impact to the price received
fractional reserve banking
banking by loaning a fraction of someones deposits
reserve requirement
the federal* requirement for how much banks are to save in reserves
*different for different countries
