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Fiscal Policy Flashcards | StudBud
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Fiscal Policy
Fiscal Policy
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1
An economies output of goods and services is the sum of all components except (Keynesian)
Government Purchases/Net Exports
Net Imports
Consumption
Investment
2
What is crowding out?
Too many businesses have entered a market. The Fed increases tax rates.
When government spending directly increases private investment.
When the demand of consumers has overrun the supply of goods/services.
Government borrowing for large projects, increasing real interest rate.
3
What is NOT a function of money?
Simplify the exchange of goods.
Price with arbitrary units.
Retain its value.
To set a standard unit for prices.
4
How does banking contribute to the economy?
Banking multiplies the amount of money circulating in an economy (loans).
Banking limits the available loans in the loanable funds market.
Banks allow for a safe place for companies to invest and save money.
Banks slow financial growth through low-risk investments.
5
What is the Liquidity Trap?
Changes in the money supply will significantly decrease interest rates.
Changes in the money supply will dramatically increase interest rates.
Changes in the money supply will not affect interest rates.
There is no change in the money supply because of the lack of net exports.
6
Keynesian Economics - prices and wages respond slowly to changes in supply and demand.
False
True
7
What type of money has intrinsic value?
Cryptocurrency
A gold coin
Cash (flat money)
Fiduciary money
8
What is the practice of laissez-faire?
The use of contractionary fiscal policy.
The practice of not interfering with the workings of the free market.
The use of expansionary fiscal policy.
The use of intervention in curbing inefficiencies and market failures.
9
Monetary Policy is the Fed's actions to increase employment, stabilize prices, and moderate interest rates.
True
False
10
During the process of crowding out, the resource distribution shifts from public to private use
False
True
11
What is crowding in?
The government raises taxes for corporations to reduce private investment.
Increased government borrowing/spending leads to higher inflation.
The government reduces spending to increase private investment.
The increase of government spending leads to more private investment.
12
What is the loanable funds market?
A system where the Fed sets interest reates for all loans.
A market for times of economic crisis when people need emergency loans.
A physical marketplace where people go to borrow and lend money in person
A way of representing all potential borrowers and savers.
13
What caused the shift from laissez-faire to fiscal policy.
The Great Depression
The Treaty of Versailles
The Civil War's Reconstruction Era
The Cold War
14
Changes in money supply have very little effect on interest rates because the demand curve for money is relatively flat.
Monetarist
Keynesian
15
How does the Fed keep track of money in the open market?
The Fed tracks the aggregate demand of the money market
The Fed tracks yearly inflation to determine the value of money.
The Fed uses two demand aggregates to keep track of the money demand D1, D2
The Fed uses two supply aggregates to keep track of the money supply M1, M2
16
Monetary Policy - A higher interest rate on a product increases the demand of that product.
True
False
17
Contractionary Fiscal Policy
The government increases spending and cuts taxes to boost economic growth.
The elimination of all debt by printing more money.
The government stops all economic activity to prevent inflation.
Less government spending and more taxes to decrease economic activity.
18
Change in money invested/spent (by the government) is equally matched by private savings. ΔI = ΔS
True
False
19
Expansionary Fiscal Policy
Less government spending to decrease economic activity
Actions by the central bank to maintain a sustainable economy.
More government spending and higher tax rates to slow economic activity.
More government spending and lower tax rates to increase economic activity.
20
What is the purpose of private and public investments in the money market?
Allows individuals and companies to make high-risk/reward investments.
Allows for individuals and companies to safely invest excess cash.
21
What is fiscal policy?
Economic influence from the government on aggregate goods/services.
Complete control over all economic and social matters.
22
How does the Fed influence banks?
The Fed sets the interest rates on reserve balances for each bank.
The Fed is responsible for setting the minimum reserve ratio for all banks.
The Fed controls the demand of money within each bank.
The Fed controls and provides bank services to consumers.
23
What is long run neutrality?
Changes in money supply affect nominal variables, not real variables.
Central banks cannot influence inflation through monetary policy.
The theory that government policies have major effects on real variables.
The philosophy that commodity money has minimal effect on the economy.
24
Keynesian Economics - the economy is viewed as inherently stable.
True
False
25
What is the equation of exchange?
MP = QV
MV = PQ
QM = VP
PV = MQ
26
What is the monetarist theory?
The philosophy that inflation is unrelated to the money supply.
Fiscal policy is the most relevant factor in defining economic growth.
Changes in money supply are the most important factors for economic growth.
Economies always fail and require constant government intervention.
27
No form of money is completely safe from loss of value.
True
False
28
What is countercyclical fiscal policy?
Increasing taxes and cutting government spending during a recession.
The government always maintaining a balanced budget.
The government acting in discord with the direction of the business cylce.
The Fed adjusts interest rates to control inflation and economic growth.
