Fiscal Policy and Trade Flashcards
Fiscal policy
The government’s budget decisions and tax policy as enacted by the president and Congress (tax law and spending appropriations). Based on the assumption that the government can control such economic forces as unemployment levels and inflation by adjusting overall demand for goods and services.
Keynesian theory
Demand side theory. John Maynard Keynes. Active government involvement was vital to the health and stability of a nation’s economy. Fiscal policy involves adjusting the level of taxation and govt spending. Increasing money in the consumers pocket encourages spending (increasing demand for goods and services). Decreasing the money supply of the consumer discourages spending (decreasing demand for goods and services). Taxes remove money, government spending puts it back
Supply side economics
holds that government should allow market forces to determine the prices of all goods. That the federal government should reduce government spending and taxes. Sellers of goods will price them at a rate that allows them to meet market demand and still sell them profitably. Create a healthy environment for business by decreasing the tax and regulatory burden on business, so that healthy businesses will grown, expanding their workforce efficiently, creating a strong and steady demand for labor. Employed people have the capital and to spend and will grow the economy.
Exchange rate
The value of one currency against another. The value of the US dollar against foreign currencies affects the balance of trade.
Balance of trade
When the value of the dollar declines against another currency, the prices of US products cost less in terms of the foreign currency. Exports will tend to increase and imports decrease.
When the value of the dollar strengthens against another currency, the price of US products increases in terms of the foreign currency. Exports will tend to decrease and imports increase.
A strong dollar means imports are less expensive here in the US. A strong dollar helps keep inflation in check in the US. A weak dollar will tend to increase the rate of inflation
Balance of payments
The flow of money between the US and other countries. Can either be a surplus or a deficit. Largest component is the balance of trade.
Balance of trade debits and credits
Debits -imports -US investments abroad -US bank loans abroad -US foreign aid Credits -exports -foreign spending in the US
