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Policy Debates

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Effectiveness of Monetary Policy and Fiscal Policy

Terms and Formulae

Terms

Active Policy - Monetary policy and fiscal policy whereby the appropriate course of action is left to the discretion of policymakers rather than to the dictates of preset rules.

Assets - Cash, stocks, bonds, and physical goods that are stores of wealth and value.

Balance Sheet - An accounting tool where assets and liabilities are compared side by side.

Borrowers - Individuals who take out loans from banks.

Budget Deficit - When the amount of money spent by the government is greater than the amount of money collected by the government.

Budget surplus - When the amount of money spent by the government is less than the amount of money collected by the government.

Capital - Physical, human, and intellectual property used to increase productivity.

Consumption - Money spent on goods and services by consumers.

Contractionary Fiscal Policy - Policy utilized by the government to slow the economy through increasing taxes and reducing government spending.

Contractionary Monetary Policy - Policy utilized by the Fed to slow the economy through selling government bonds, increasing the reserve requirement, and increasing the federal funds interest rate.

Crowding In - When government spending induces private investment.

Crowding Out - When government spending reduces private investment.

Currency - Money, either fiat or commodity, that is commonly used in an economy.

Demand Deposits - Deposits made by in banks that can be withdrawn at any time--that is, on demand.

Deposits - Money given to banks for safekeeping and to earn interest.

Detection Lag - A difference in time between when an economic problem occurs and when it is noticed by economists.

Discretionary Policy - Monetary policy and fiscal policy whereby the appropriate course of action is left to the discretion of policymakers rather than to the dictates of preset rules.

Expansionary Fiscal Policy - Policy utilized by the government to stimulate the economy through reducing taxes and increasing government spending.

Expansionary Monetary Policy - Policy utilized by the Fed to stimulate the economy through purchasing government bonds, reducing the reserve requirement, and reducing the federal funds interest rate.

Factors of Production - The inputs of capital and labor required to produce output whose improvement leads to productivity increases.

Federal Deposit Insurance Corporation - A corporation that insures individual bank accounts up to $100,000 to ensure that the public is confident in the banking system.

Federal Funds Interest Rate - The discount interest rate at which the branch banks of the Fed loan money to other banks.

Federal Reserve - The federal group that controls the money supply though monetary policy and fiscal policy.

Federal Reserve Banks - Branches of the Fed that serve as banks for non-government controlled banks by accepting deposits, giving withdrawals, and making loans as needed.

Financial Intermediary - An entity, like a bank, that works between savers and borrowers by accepting deposits and making loans.

Fiscal Policy - Policy utilized by the government to affect the economy through taxes and government spending.

Fractional Reserve Banking System - A banking system wherein less than 100% of the deposits are required to be held as reserves.

Government Bonds - Bonds issued by the government and bought and sold by the Fed as a form of monetary policy to manipulate the money supply.

Government Spending - Money spent by the government on goods and services.

Inflation - An increase in the price level over time.

Interest - Money paid by a borrower to a lender in return for the use of money in the form of a loan.

Interest Rate - The rate of interest in the form of percent of the balance due per year.

Investment - Money spent on capital goods that increase productivity in the long run.

Lender - One who gives money to be repaid at a later date, with interest.

Liabilities - Money owed.

Loans - Money given by lenders to borrowers.

Monetary Policy - Policy utilized by the Fed to affect the economy through open market operations, changing the reserve requirement, and changing the federal funds interest rate.

Money - The stock of assets used in transactions within an economy.

Money Multiplier - The number that describes the change in the money supply given an initial deposit and a reserve requirement. (See the Formula.)

Money Supply - The total amount of currency in circulation as controlled by Fed policy.

National Debt - Money owed by the government from budget deficits.

National Savings - The difference between government spending and the amount of money collected in taxes.

Net Exports - The difference between exports and imports.

Open Market Operations - The purchase and sale of government bonds by the Fed in order to affect the money supply.

Paper Balances - Deposits that exist on paper but are not backed by physical currency.

Passive Policy - Monetary policy and fiscal policy whereby the appropriate course of action is left to the dictates of preset rules rather than to the discretion of policymakers.

Policy by Rule - Monetary policy and fiscal policy whereby the appropriate course of action is left to the dictates of preset rules rather than to the discretion of policymakers.

Policy Lag - The difference between when a policy is enacted and when it has the intended effects upon the economy.

Price Level - The overall level of prices within an economy.

Principle - The initial amount of money given as a loan.

Real GDP - The total value of goods and services produced in an economy value in constant dollars.

Real Variables - Economic variables that are valued in constant dollars.

Reserve - Money not given out in loans that is available for repaying depositors.

Reserve Requirement - The percent of total deposits required to be held back for repaying depositors. This is controlled by the Fed as a form of monetary policy.

Savers - Individuals who deposit money in banks.

Supply Side - Economic policies that affect suppliers rather than consumers.

Treasury - The government agency that prints, mints, and stores money.