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AP Macroeconomics > Fiscal Policy > Flashcards

Fiscal Policy Flashcards

1
Q

Fiscal Policy

A

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

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2
Q

Expansionary Fiscal Policy

A

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

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3
Q

Contractionary Fiscal Policy

A

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

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4
Q

Government Spending Multiplier

A

Government Spending Multiplier = 1/MPS

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5
Q

Tax Multiplier

A

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

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6
Q

Balanced Budget Multiplier

A

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

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7
Q

Crowding Out

A

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

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8
Q

Partial Crowding Out

A

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

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9
Q

Complete Crowding Out

A

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

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10
Q

Monetary Policy

A

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

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11
Q

Expansionary Monetary Policy

A

Increasing the money supply or lowering the interest rate

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12
Q

Contractionary Monetary Policy

A

Decreasing the money supply or raising the interest rate

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13
Q

Money

A

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

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14
Q

Commodity Money

A

Has value beyond its usefulness as money

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15
Q

Flat Money

A

Has no other value besides being money

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16
Q

Medium of Exchange

A

Allows for money to be traded

17
Q

Double Coincidence of Wants

A

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

18
Q

Store of Value

A

Ability of money to store a set value

19
Q

Unit of Account

A

Ability of money to set prices based off its value

20
Q

Money Supply Aggregates

A

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

21
Q

Fractional Reserve Banking System

A

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

22
Q

Reserve Ratio (rr)

A

Reserve Ratio = Bank Reserves/Total Deposits

23
Q

Balance Sheet (T Account)

A

Shows the activities of a bank

24
Q

Money Creation

A

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

25
Q

Money Multiplier

A

Money Multiplier = 1/rr

26
Q

Discount Rate

A

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

27
Q

Open Market Operations

A

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

28
Q

Liquidity Trap

A

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

29
Q

Equation of Exchange

A

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

30
Q

Velocity of Money

A

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

31
Q

Quantity Theory of Money

A

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

32
Q

Real Interest Rate

A

Real Interest Rate = Nominal Interest Rate - Anticipated Inflation

33
Q

Nominal Interest Rate

A

Nominal Interest Rate = Real Interest Rate + Anticipated Inflation

34
Q

Natural Rate of Real Interest

A

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

35
Q

Fisher Effect

A

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

AP Macroeconomics (4 decks)

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