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Policy Debates

Terms and Formulae

Summary

Effectiveness of Monetary Policy and Fiscal Policy

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Demand Deposits  -  Deposits made by in banks that can be withdrawn at any time--that is, on demand.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.
Formulae
 
Output Output = Y = C(Y - T) + I + G + NX
 
Money Multiplier Money multiplier = 1 / (reserve requirement)

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