Contractionary Fiscal Policy
Policy enacted by the government that reduces output.
Examples include raising taxes and decreasing
Contractionary Monetary Policy
Policy enacted by the Fed that reduces the money supply and thus reduces output. Examples include
selling government bonds, raising the reserve requirement, and raising the federal funds interest rate.
Physical money used in an economy.
Money in a bank that can be withdrawn at any time, that is, on demand.
Assets placed in a bank for storage and profit.
Income that can be spent after taxes.
Expansionary Fiscal Policy
Policy enacted by the government that increases output.
Examples include lowering taxes and increasing government
Expansionary Monetary Policy
Policy enacted by the Fed that increases the money supply
and thus increases output. Examples include purchasing
government bonds, lowering the reserve requirement, and
lowering the federal funds interest rate.
Short for the Federal Reserve, the government agency that
controls monetary policy.
Federal Funds Interest Rate
The rate that banks pay to borrow money from branches of
Policy that uses taxation and government spending to steer
Fractional Reserve Banking System
A system of banking, like in the US, where only a portion
of deposits are help in reserves. The rest is returned to
the public as loans, thereby increasing the money supply
and stimulating economic growth.
Bonds issued by the government and sold by the Fed during
open market operations as a means of monetary policy.
Money that the government spends on goods and services like
employees, social security, and defense.
Government Spending Multipliers
Numbers that increase the change in output affected by a
change in government spending due to consumer's marginal
propensity to consume.
The rate paid to lenders by borrowers in return for the use
of a sum of money.
Marginal Propensity to Consume
A number that describes the amount of an additional dollar of
income that a consumer will spend rather
Policy enacted by the Fed to affect output. The three
basic types include performing open market operations,
changing the reserve requirement, and manipulating the
federal funds interest rate.
A means of exchange, store of value, and unit of account
within an economy.
The number that describes the total change in the money
supply resulting from a single deposit in a bank under a
fractional reserve banking system.
The total amount of money in an economy including both
demand deposits and currency.
Numbers that dictate the overall effect of a policy change
on the output of an economy.
Output. (See the definition of output.)
Open Market Operations
The purchase and sale of government bonds by the Fed as a
form of monetary policy.
The total amount of goods and services produced within an economy in a given period of time.
The overall level of prices within an economy.
The total amount of goods and services produced within an economy in a given period of time valued in
The percentage of deposits that banks are required to keep in reserves and not give out as loans. This
can be manipulated by the Fed under monetary policy.
Numbers that describe the overall change in output created by a change in taxes due to fiscal policy
Money collected by the government to maintain its services.
Theory of Money Demand
This basically states that as the demand for money increases, so does the interest rate.
Output = national income = Y = C(Y - T) + I + G + NX
In this formula, C is consumption, Y is income, T is taxes, I is investment,
G is government spending,
and NX is
Total change in output as a result of a change in tax policy
Total change in output as a result of a change in tax policy = [(change in taxes) * -MPC] / (1 - MPC)
Total change in output as a result of a change in government spending
Total change in output as a result of a change in government spending = (change in government
purchases) / (1