Unit 14 Flashcards
What is monetary policy?
is what the FRB engages in when it attempts to influence the money supply
What is FISCAL POLICY?
refers to the government’s BUDGET DECISIONS and TAX POLICY as enacted by our PRESIDENT AND CONGRESS
True or False
the political process DOES NOT determine fiscal policy
False
The political process DOES determines fiscal policy.
It takes time for conditions and solutions to be identified and implemented.
What ASSUMPTION is FISCAL POLICY based on?
is 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.
Why is FISCAL POLICY not considered the MOST EFFICIENT means to solve SHORT-TERM economic problems?
Due to the LENGTH OF TIME it may take to ENACT fiscal policy decisions
What are the TYPES OF POLICIES impact our economy?
monetary and fiscal
What is an important factor of a healthy economy?
Trade
How does FISCAL POLICY increase/decrease the money supply and HOW do they do this?
Fiscal policy depends on the use of TAXATION and FEDERAL SPENDING to increase or decrease the money supply through ENCOURAGING OR DISCOURAGING consumer and business spending.
What are the main FISCAL policy theories?
Keynesian
Supply-side
Why is it important to trade with OTHER COUNTRIES?
Trading with other nations allows our economy to take advantage of DIFFERING STRENGTHS of our trading partners.
What is another name for the KEYNESIAN theory?
Demand side theory
The __________________ directly affects INTERNATIONAL TRADE
RELATIVE VALUE of a NATION’S CURRENCY
KEYNESIANS believes that GOODS ultimately control what?
EMPLOYMENT and PRICES
Insufficient demand for goods causes UNEMPLOYMENT;
too much demand causes INFLATION.
FISCAL POLICY involves adjusting the LEVEL of _________ and ____________
TAXATION
And
GOVERNMENT SPENDING
What is the main point of DEMAND SIDE THEORY?
DIRECTLY INCREASING the SUPPLY OF MONEY to the consumer
Based on the KEYNESIAN theory, the GOVERNMENT affects INDIVIDUAL LEVELS of SPENDING AND SAVING by ___________.
adjusting taxes
What is the effect of INCREASING TAXES based on KEYNESIAN?
Increasing taxes REMOVES MONEY from the private sector, which reduces private-sector DEMAND AND SPENDING
Based on the KEYNESIAN theory. What was the ROLE OF GOVERNMENT?
Keynes believed it was the government’s right and responsibility to MANIPULATE OVERALL DEMAND (and therefore artificially manipulate the economy) by changing its own levels of SPENDING AND TAXATION.
How can the government INCREASE private-sector DEMAND FOR GOODS?
REDUCE TAXES, which INCREASES people’s DISPOSABLE INCOME.
Based on the DEMAND-SIDE theory, INCREASING money in the consumer’s pocket encourages __________
spending
increasing the DEMAND for goods and services
DECREASING the MONEY SUPPLY of the consumer discourages
spending
so decreases demand for goods and services
What was the main belief behind the Keynesian theory?
held that active government involvement in the economy was vital to the health and stability of a nation’s economy.
Describe the supply-side theory
holds that government should allow market forces to determine prices of all goods.
Supply-siders believe the federal government should reduce government spending, as well as taxes.
How does the supply side theory on creating a healthy environment for business?
by decreasing the tax and regulatory burden on business.
Explain effect a decline in the dollar value against another country’s
the prices of U.S. products cost less in terms of the foreign currency.
What is a commonality of the two theories : demand side theory and supply side theory?
Both theories believe that decreasing taxes encourages economic activity and increasing discourages economic activity.
What are the viewpoints held by demand side theory and supply side theory on GOVERNMENT SPENDING?
Demand-side
sees government spending as ENCOURAGING economic activity.
Supply-side
sees government spending as an INEFFICIENT and temporary approach, and that holding down government debt is better overall.
Explain the effect a strengthening in the dollar value against another country’s
the price of U.S. products increases in terms of the foreign currency.
All of the following situations could cause a fall in the value of the U.S. dollar in relation to the Japanese yen except
A. Japanese investors buying U.S. Treasury securities.
B. U.S. investors buying Japanese securities.
C. an increase in Japan’s trade surplus over that of the United States.
D. a general decrease in U.S. interest rates.
A
Which organization or governmental unit sets fiscal policy? A. Federal Reserve Board (FRB) B. Government Economic Board C. Congress and the president D. Secretary of the Treasury
C
Which of the following ECONOMISTS is considered a supporter of DEMAND-SIDE economics?
A. Adam Smith
B. John Maynard Keynes
C. Arthur Laffer
D. Milton Friedman
B. John Maynard Keynes
What is the exchange rate?
The value of one currency against another
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In the American society what will affect the BALANCE OF TRADE?
The VALUE of the U.S. dollar AGAINST foreign currencies
Ford, an auto manufacturer based in the United States builds the Focus, a small passenger sedan.
Toyota, a car manufacturer based in Japan builds the Corolla, a small passenger sedan.
The Focus is priced in dollars, and the Corolla is priced in yen.
If the dollar WEAKENS against the yen, what will be the result?
— It will cost more dollars to get yen and fewer yen to buy dollars.
— The PRICE of the Focus DECREASES in yen, and so SALES of the Focus INCREASE in Japan.
— Conversely, the PRICE of the Corolla INCREASES in dollars, so SALES of the Corolla DECREASES in the United States.
What does a STRONG U.S. dollar mean?
means IMPORTS are LESS EXPENSIVE in the United States.
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True or False
The net effect is that a STRONG DOLLAR helps keep INFLATION in check in the United States.
True
What will be the impact of a WEAK dollar on INFLATION?
Tends to INCREASE the RATE OF INFLATION
What is BALANCE OF PAYMENTS?
The FLOW OF MONEY between the United States and OTHER COUNTRIES
WHEN is the BALANCE OF PAYMENTS a SURPLUS?
MORE MONEY flowing INTO the United States than OUT
WHAT will happen to IMPORTS AND EXPORTS when there is a DECLINE IN THE DOLLAR against another country’s currency?
EXPORTS will tend to INCREASE
IMPORTS will tend to DECREASE
When is the BALANCE OF PAYMENTS a DEFICIT?
When INTEREST RATES in another country are HIGH because MONEY FLOWS TO WHEREIT EARNS THE HIGHEST RETURN.
What is the LARGEST COMPONENT of a BALANCE OF PAYMENT?
BALANCE OF TRADE—
the export and import of merchandise.
WHEN is there a DEFICIT OF PAYMENTS?
When debits EXCEEDS credits
When is there a surplus of payments?
when credits exceed debits, a surplus exists in the balance of payments occurs
What are some debit items under the balance of trade?
Imports, U.S. investments abroad, U.S. bank loans abroad, U.S. foreign aid
What are some credit items under the balance of trade?
Exports, Foreign spending in the U.S.
