Econ - Test #3

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Council of Economic Advisors

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A group of three economists appointed by the president to provide expertise an assistance on economic matters.

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Consists of deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth. The word means 'Fiscal' means financial.

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Fiscal Policy

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Is carried out by the legislative and/or the executive branches of government. The two main instruments of fiscal policy are government expenditures and taxes. The government collects taxes in order to finance expenditures on a number of public goods and services—for example, highways and national defense.

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Expansionary Fiscal Policy

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Budget Deficit

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Government spending in excess of tax revenues

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Contradictory Fiscal Policy

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Budget Surplus

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Government spending in excess of tax revenues.

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Built-in-Stablizer

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Anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers.

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Progressive Tax System

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The average tax rate rises with GDP = Tax Revenue/GDP.

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Proportional Tax System

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The average tax rate remains constant constant as GDP rises.

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Regressive Tax System

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The average tax rate falls as GDP rises.

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Standardized Budget

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Used by economists to adjust actual Federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes. It measures what the federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved it's full employment of GDP. (Its' potential output)

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Cyclical Deficit

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A by product of the economy's slide into recession, not the result of discretionary fiscal actions by the government.

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Political Business Cycle

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A business cycle that results primarily from the manipulation of policy tools (fiscal policy, monetary policy) by incumbent politicians hoping to stimulate the economy just prior to an election and thereby greatly improve their own and their party's reelection chances.

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Crowding-Out Effect

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Describes the idea that large volumes of government borrowing push up the real interest rate, making it difficult or close to impossible for individuals and small companies to obtain loans.

This begins to take effect when the interest rate level reaches a point at which only the government can afford to borrow. Unable to compete for loans under such circumstances, individuals and smaller-scale companies are forced (crowded) out of the market.

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Public Debt

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The total amount owed by the Federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses.

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U.S Securities

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U.S Treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt.

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External Public Debt

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The portion of the public debt owed to foreign citizens, firms, and institutions.

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Public Investments

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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).

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Fractional Reserve Banking System

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A reserve requirement that is less than 100 percent of the checkable-deposit liabilities of a commercial bank of thrift institution.

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Balance Sheet

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A statement of the assets, liabilities, and net worth of a firm or individual at some point given time.

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Vault Cash

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The currency a bank has in its' vault and cash drawers.

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Required Reserves

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The funds that banks and thrifts must deposit with the Federal Reserve Bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of the bank's or thrift's checkable deposit.

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Reserve Ratio

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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.

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Excess Reserves

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The amount by which a bank's or thrift's actual reserves exceed its required reserves minus required reserves.

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Actual Reserves

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The funds that a bank has on deposit at the Federal Reserve Bank of its district (plus its vault cash)

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Federal Funds Rate

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The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves.

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Monetary Multiplier

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The multiple of its excess reserves by which the banking system can expand.

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Monetary Policy

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A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability

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Interest

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The payment made for the use of money (of borrowed funds).

IR - refers to rate at which interest is paid.

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Transactions Demand for Money

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The amount of money people want to hold for use as a medium exchange (to make payments) varies directly with nominal GDP.

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Asset Demand

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The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.

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Total Demand for Money

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The sum of the transactions demand for money and the asset demand for money.

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Open-Market Operations

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The buying and selling of U.S government securities by the Federal Reserve Banks for the purpose of carrying out Monetary Policy.

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Reserve Ratio

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The fraction of checkable deposits that a bank must hold as reserves in a Federal reserve bank ot in it's own bank vault; also called the Reserve Requirement.

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Discount Rate

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The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions.

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Term Auction Facility

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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.

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Federal Funds Rate

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The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves.

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Expansionary Monetary Policy

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Federal reserves system actions to increase the money supply, lower interest rates, and expand real GDP, an easy money policy.

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Prime Interest Rate

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Restrictive Monetary Policy

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Taylor Rule

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Cyclical Asymmetry

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Mortgage Debt Crisis

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Medium of Exchange

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Unit of Account

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Store of Value

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Liquidity

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M1

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Federal Reserve Notes

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Token Money

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Thrift Institutions

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Near-Monies

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M2

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Savings Account

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Money Market Deposit Account

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Legal Tender

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Federal Reserve System

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Board of Governors

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Federal Reserve Banks

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The 12 banks chartered by the U.S government to control the money supply and perform other functions. (Eg. Central bank, quasi bank and more. )

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Financial Services Industry

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The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses

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Electronic Payments

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Purchases made by transferring funds electronically. Examples: Fedwire transfers, automated clearing-house transactions (ACHs), payments via the PayPal system, and payments made through store-valued cards.