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Monetary and Fiscal Policy

fiscal policy consists of deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth. (The adjective “fiscal” simply means “financial.”)
Council of Economic Advisers (CEA) a group of three econo mists appointed by the president to provide expertise and assistance on economic matters.
expansionary fiscal policy This policy consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP
budget deficit government spending in excess of tax revenues.
contractionary fiscal policy When demand-pull inflation occurs it may help control it. This policy consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation.
budget surplus tax revenues in excess of government spending.
built-in stabilizer is anything that increases the government’s budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or re- duces its budget deficit) during an expansion without requiring explicit action by policymaker
progressive tax system the average tax rate (=tax revenue/GDP) rises with GDP.
proportional tax system the average tax rate remains constant as GDP rises
regressive tax system the average tax rate falls as GDP rises.
cyclically adjusted budget (also called the full-employment budget ) to adjust actual Federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes.
cyclical deficit by-product ofthe economy’s slideinto recession,not result of discretionary fiscal actions by the gov.Don't conclude from this deficit that the gov.is engaging in an expansionary fiscal policy. The gov.’s fiscal policy hasn't changed. It is still neutral.
political business cycle swings in overall economic activity and real GDP resulting from election-motivated fiscal policy,
crowding-out effect An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy
public debt essentially the accumulation of all past Federal deficits and surpluses. The deficits have greatly exceeded the surpluses and have emerged mainly from war financing,recessions, and fiscal policy.
U.S. securities financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues
external public debt The portion of the public debt owed to foreign citizens, firms, and institutions.
public investments Government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health).
identify and explain the functions of money Money represents the debts of gov.&instit. offering checkable deposits&has value bc of the goods,services,&resources it will command in the market.Maintaining the purchasing power of money depends largely on the gov’s effect.in managing the money supply.
medium of exchange Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter
unit of account A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money
store of value An asset set aside for future use; one of the three functions of money
liquidity The ease with which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have a lesser degree of liquidity.
M 1 The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.
Federal Reserve Notes Paper money issued by the Federal Reserve Banks
token money Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.
checkable deposits Any deposit in a commercial bank or thrift institution against which a check may be written.
commercial banks A firm that engages in the business of banking(accepts deposits, offers checking accounts, and makes loans).
thrift institutions A savings and loan association, mutual savings bank, or credit union
near-monies Financial assets, the most important of which are noncheckable savings accounts, time deposits, and U.S. short-term securities and savings bonds, which are not a medium of exchange but can be readily converted into money.
M 2 A more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts ), small time deposits (deposits of less than $1 00,000), and individual money market mutual fund balances.
savings account A deposit in a commercial bank or thrift institution on which interest payments are received; generally used forsaving rather than daily transactions; a component of the M2 money supply.
money market deposit account (MMDA) Bank-and thrift-provided interest-bearing accounts that contain a variety of short-term securities; such accounts have minimum balance requirements and limits on the frequency of withdrawals.
time deposits An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.
money market mutual fund (MMMF) Interest-bearing accounts offered by investment companies, which pool depositors’ funds for the purchase of short-term securities. Depositors can write checks in minimum amounts or more against their accounts.
legal tender A nation’s official currency (bills and coins). Payment of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example, “cash only” or “check or credit card only.”
Federal Reserve System The U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 1 2 Federal Reserve Banks, which controls the lending activity of the nation’s banks and thrifts and thus the money supply; commonly referred to as the “Fed.”
Board of Governors The seven-member group that supervises and controls the money and banking system of the United States; the Board of Governors of the Federal Reserve System; the Federal Reserve Board.
Federal Reserve Banks The 12 banks chartered by the U.S. government to control the money supply and perform other functions.
Federal Open Market Committee (FOMC) The 12-member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities.
subprime mortgage loans High-interest rate loans to home buyers with above-average credit risk
mortgage-backed securities Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property.
securitization The process of aggregating many indiv.finan. debts,such as mortgages/student loans,into a pool and then issuing new securities backed by the pool.The holders of the new securities are entitled to receive debt payts.made on the indiv.finan.debt inthe pool.
moral hazard The possibility that individuals or institutions will change their behavior as the result of a contract or agreement. Example: A bank whose deposits are insured against losses may make riskier loans and investments.
Troubled Asset Relief Program (TARP) A 2008 Federal government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in extreme financial trouble and therefore at high risk of failure.
financial services industry Catg.of firms that prov.finan.products/ serv. to help households&busin.earn int.,receive dividends,obtain capital gains,insure against losses,&plan for retirement.Incl.comm.banks, thrifts,insur.comp.,mutualfund comp.,pension funds,invest.banks,&secu.firm
Wall Street Reform and Consumer Protection Act Gives authority tothe Fed to regu.large finan.instits.,create oversight council 4 risk to finan.system, establish process 4 the gov.to sell assets of failing finan. instits. ,prov.Federal regul.oversight of assetbacked secur.,&create finan.consu.prot.bure
monetary policy A central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.
interest The payment made for the use of money (of borrowed funds).
transactions demand for money The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP
asset demand for money The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate
total demand for money The sum of the transactions demand for money and the asset demand for money
open-market operations The buying and selling of U.S. government securities by the Federal Reserve Banks for purposes of carrying out monetary policy
reserve ratio The fraction of checkable deposits that a bank must hold as reserves in a Federal Reserve Bank or in its own bank vault; also called the reserve requirement
discount rate The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions
term auction facility The monetary policy procedure used by the Federal Reserve, in which commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system.
Federal funds rate The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
expansionary monetary policy Federal Reserve System actions to increase the money supply , lower interest rates, and expand real GDP ; an easy money policy.
prime interest rate The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.
restrictive monetary policy Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation ; a tight money policy.
Taylor rule A modernrule props.by economist JohnTaylor that would stipulate exactly how much the Federal Reserve should change real intr.rates in response to divergences of real GDP from poten. GDP&divergences of actual rates of inflation from a tagt.rateof inflation
cyclical asymmetry The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession.
liquidity trap A situation in a severe recession in which the Fed’s injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand
Created by: mmoreno12