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Contractionary Fiscal Policy
Policy enacted by the government that reduces output. Examples include raising taxes and decreasing government spending.
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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.
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Currency
Physical money used in an economy.
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Demand Deposits
Money in a bank that can be withdrawn at any time, that is, on demand.
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Deposits
Assets placed in a bank for storage and profit.
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Disposable Income
Income that can be spent after taxes.
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Expansionary Fiscal Policy
Policy enacted by the government that increases output. Examples include lowering taxes and increasing government spending.
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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.
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Fed
Short for the Federal Reserve, the government agency that controls monetary policy.
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Federal Funds Interest Rate
The rate that banks pay to borrow money from branches of the Fed.
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Fiscal Policy
Policy that uses taxation and government spending to steer the economy.
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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.
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Government Bonds
Bonds issued by the government and sold by the Fed during open market operations as a means of monetary policy.
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Government Spending
Money that the government spends on goods and services like employees, social security, and defense.
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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.
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Interest Rate
The rate paid to lenders by borrowers in return for the use of a sum of money.
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Marginal Propensity to Consume
A number that describes the amount of an additional dollar of income that a consumer will spend rather than save.
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Monetary Policy
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.
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Money
A means of exchange, store of value, and unit of account within an economy.
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Money Multiplier
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.
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Money Supply
The total amount of money in an economy including both demand deposits and currency.
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Multipliers
Numbers that dictate the overall effect of a policy change on the output of an economy.
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National Income
Output. (See the definition of output.)
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Open Market Operations
The purchase and sale of government bonds by the Fed as a form of monetary policy.
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Output
The total amount of goods and services produced within an economy in a given period of time.
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Price Level
The overall level of prices within an economy.
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Real Output
The total amount of goods and services produced within an economy in a given period of time valued in constant currency.
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Reserve Requirement
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.
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Tax Multipliers
Numbers that describe the overall change in output created by a change in taxes due to fiscal policy change.
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Taxes
Money collected by the government to maintain its services.
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Theory of Money Demand
This basically states that as the demand for money increases, so does the interest rate.
Formulae
| 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 net exports. |
| 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 - MPC) |
