Fiscal Policy

Question 1

Fiscal Policy

Answer 1

The government’s attempt to counter fluctuations in aggregate expenditure with changes in purchases, transfer payments, or taxes

Question 2

Expansionary Fiscal Policy

Answer 2

Involves increasing government purchases, increasing transfers, or decreasing taxes in order to shift AD to the right and boost real GDP

Question 3

Contractionary Fiscal Policy

Answer 3

Involves decreasing government purchases, decreasing transfers, or increasing taxes in order to shift AD to the left and decrease real GDP

Question 4

Government Spending Multiplier

Answer 4

Government Spending Multiplier = 1/MPS

Question 5

Tax Multiplier

Answer 5

Indicates the total change in real GDP resulting from each $1 change in taxes (Tax Multiplier = -(MPC/MPS))

Question 6

Balanced Budget Multiplier

Answer 6

Combination of both the Government Spending Multiplier and the Tax Multiplier (Equal to 1)

Question 7

Crowding Out

Answer 7

The decrease in real investment stemming from higher interest rates due to government purchases

Question 8

Partial Crowding Out

Answer 8

When the effect of crowded-out investment on real GDP is smaller than the initial increase in real GDP due to purchases

Question 9

Complete Crowding Out

Answer 9

When the decrease in investment eliminates the entire boost in real GDP from increased purchases

Question 10

Monetary Policy

Answer 10

The use of money and credit controls to influence interest rates, inflation, exchange rates, unemployment, and real GDP

Question 11

Expansionary Monetary Policy

Answer 11

Increasing the money supply or lowering the interest rate

Question 12

Contractionary Monetary Policy

Answer 12

Decreasing the money supply or raising the interest rate

Question 13

Money

Answer 13

Anything that is commonly accepted as a means of payment for goods and services

Question 14

Commodity Money

Answer 14

Has value beyond its usefulness as money

Question 15

Flat Money

Answer 15

Has no other value besides being money

Question 16

Medium of Exchange

Answer 16

Allows for money to be traded

Question 17

Double Coincidence of Wants

Answer 17

Means that a person who owns the goods or services you want has a desire for what you have to barter with

Question 18

Store of Value

Answer 18

Ability of money to store a set value

Question 19

Unit of Account

Answer 19

Ability of money to set prices based off its value

Question 20

Money Supply Aggregates

Answer 20

M0: Cash
M1: M0 + Checking Deposits and Traveler’s Checks
M2: M1 + savings deposits, small time deposits, money market mutual funds, and Eurodollar deposits

Question 21

Fractional Reserve Banking System

Answer 21

Only a fraction of total deposits are held on reserve and the rest is lent out

Question 22

Reserve Ratio (rr)

Answer 22

Reserve Ratio = Bank Reserves/Total Deposits

Question 23

Balance Sheet (T Account)

Answer 23

Shows the activities of a bank

Question 24

Money Creation

Answer 24

Ability of banks to increase the money supply as they loan money out to people, who will put it into other banks

Question 25

Money Multiplier

Answer 25

Money Multiplier = 1/rr

Question 26

Discount Rate

Answer 26

The interest rate banks pay to borrow money from the Fed (As it decreases, banks borrow more and increase the money supply)

Question 27

Open Market Operations

Answer 27

Involve the Fed purchase and sale of government bonds (As bonds are sold, money is taken out of circulation, decreasing the money supply)

Question 28

Liquidity Trap

Answer 28

Changes in the money supply will have no effect on interest rates

Question 29

Equation of Exchange

Answer 29

Money Supply times Velocity equals the average Price times Quantity (MV = PQ)

Question 30

Velocity of Money

Answer 30

The number of times per period that the average dollar is spent on final goods and services

Question 31

Quantity Theory of Money

Answer 31

States that both V and Q are stable, meaning increases in M affect P

Question 32

Real Interest Rate

Answer 32

Real Interest Rate = Nominal Interest Rate - Anticipated Inflation

Question 33

Nominal Interest Rate

Answer 33

Nominal Interest Rate = Real Interest Rate + Anticipated Inflation

Question 34

Natural Rate of Real Interest

Answer 34

Fluctuations in the nominal interest rate simply reflect changes in anticipated inflation

Question 35

Fisher Effect

Answer 35

States that if market participants can predict that the Fed will counter inflation by reducing money supply growth, anticipated inflation and nominal interest rates will begin to fall when the Fed tightens the money supply