Monetary and Fiscal Flashcards
Who controls the budget process?
The president proposes, Congress disposes.
What are the three historical periods of budget control in the U.S.?
1789–1921: Congress Controlled, 1921–1974: President Controlled, 1974–Present: Shared Control.
What law required the president to submit a budget proposal to Congress?
Budget and Accounting Act of 1921.
What are the four phases of the federal budget cycle?
- Proposal
- Congressional review
- Appropriations
- Implementation
What happens if no budget is passed by October 1?
Congress passes a continuing resolution or there is a government shutdown.
What is the difference between mandatory and discretionary spending?
Mandatory is required by law (e.g., Social Security), discretionary is determined annually (e.g., military).
What is the largest category of discretionary spending?
The military.
What is the difference between progressive and regressive taxes?
Progressive taxes increase with income, regressive taxes take a larger percentage from lower-income individuals.
What are the primary sources of federal revenue?
- Individual income tax (largest)
- Social insurance tax
- Corporate income tax
- Excise taxes
- Other fees
What happens to consumer demand if Congress increases taxes?
It decreases.
If unemployment is high, what two fiscal policy actions might the government take?
- Decrease taxes
- Increase spending
What is a historical example of fiscal policy improving the U.S. economy?
The New Deal.
What is the main goal of the Federal Reserve?
Maintain a healthy economy by keeping inflation low and employment high.
What are the three main tools of the Federal Reserve?
- Open market operations
- Reserve requirements
- Interest rates (discount rate)
What is open market operations?
Buying or selling government bonds to control the money supply.
What happens to the money supply if the Federal Reserve sells bonds?
It decreases.
What happens to the money supply if the Federal Reserve buys bonds?
It increases.
What happens if the Federal Reserve increases the reserve requirement?
Banks must hold more money, reducing the money supply.
What happens if the Federal Reserve lowers the reserve requirement?
Banks can lend more, increasing the money supply.
What happens if the Federal Reserve raises interest rates?
Borrowing becomes more expensive, reducing money in circulation.
What happens if the Federal Reserve lowers interest rates?
Borrowing becomes cheaper, increasing money in circulation.
If inflation is rising too quickly, what action should the Federal Reserve take?
- Increase reserve requirements
- Increase interest rates
- Sell bonds
If unemployment is rising, what action should the Federal Reserve take?
- Decrease reserve requirements
- Lower interest rates
- Buy bonds
What is another term for ‘interest rate’?
Discount rate.
What is monetary policy?
Actions by the Federal Reserve to control money and credit in the economy.
What is fiscal policy?
Government policy on taxes and spending to influence the economy.
What happens when the government increases spending and lowers taxes?
Economic growth, increased employment, but higher deficits.
What happens when the government decreases spending and raises taxes?
Slower economic growth, reduced inflation, lower deficits.
What is one way the Federal Reserve regulates economic activity?
Controlling the money supply.
If inflation reaches 50% per year, what should the Federal Reserve do?
- Increase reserve requirements
- Raise interest rates
- Sell bonds
If unemployment is high and inflation is low, what should the Federal Reserve do?
Decrease interest rates to encourage borrowing.
Which of these is NOT a function of the Federal Reserve?
Managing the federal deficit.
What are the goals of monetary policy?
- Maximum employment
- Stable prices
- Moderate long-term interest rates
What are entitlements?
Government benefits required by law, like Social Security and Medicare.
What is the largest category of federal spending?
Mandatory spending (e.g., Social Security).
What is a budget deficit?
When government spending exceeds revenue.
What is the national debt?
The total amount of money the U.S. government owes.
