Fiscal Policy Basics
The two main tools Congress uses to conduct fiscal policy.
What are government spending and taxes?
Automatic economic mechanisms, such as income tax brackets and unemployment benefits, that adjust with economic conditions without needing new legislation.
What are automatic stabilizers?
The central banking system of the United States responsible for managing monetary policy.
What is the Federal Reserve (the Fed)?
What the Fed generally does to interest rates when the economy enters a recession and needs encouragement to grow.
What is lowers interest rates?
The Fed’s two official goals set by Congress, known together as the "Dual Mandate": price stability and this.
What is maximum employment?
The branch of the U.S. government primarily responsible for introducing and passing fiscal policy legislation.
The branch of the U.S. government primarily responsible for introducing and passing fiscal policy legislation.
The concept where heavy government borrowing increases interest rates, making it slightly more expensive for private businesses to borrow and invest.
what is the crowding-out effect?
Why is the Federal Reserve different than other parts of the government?
They are not part of the three branches of government and work autonomously
The action the Fed takes with government bonds when it wants to inject reserves into banks and increase the money supply.
What is buying bonds?
he main reason why Fed interest rate changes often take 12 to 18 months to show their full effect on inflation and business activity.
What is time lags (or operational lags)?
The type of fiscal policy used during a recession to stimulate aggregate demand by increasing spending or cutting taxes.
What is expansionary fiscal policy?
The delay between when an economic problem actually begins and when policymakers collect enough data to notice it.
What is recognition lag?
The specific target interest rate that commercial banks charge each other for overnight loans of reserves.
What is the Federal Funds Rate?
The action the Fed takes with government bonds when it wants to pull reserves out of the banking system to raise interest rates.
hat is selling bonds?
What happens to foreign investor demand for the U.S. dollar when U.S. interest rates rise higher than rates in other countries.
What is demand increases (strengthening the dollar)?
The type of fiscal policy designed to slow down an overheating economy and cool off high inflation.
What is contractionary fiscal policy?
The delay caused by political debates in Congress while trying to draft and pass a fiscal stimulus bill.
What is legislative (or administrative) lag?
The traditional monetary tool where the Fed buys or sells U.S. government bonds in the open market.
What are Open Market Operations (OMOs)?
What tool of the Fed impacts how much money banks are not allowed to lend out?
The Reserve Requirement
he challenging economic scenario combining high inflation and high unemployment at the same time, making policy decisions difficult.
What is stagflation?
Federal budget items like Social Security and Medicare that are required by existing law, making them difficult to adjust quickly for short-term policy.
What is mandatory spending (or entitlement spending)? Or Automatic Stabilizer, or Non-Discretionary Spending
The main short-term economic risk or trade-off when Congress cuts spending or raises taxes to curb high inflation.
What is higher unemployment (or slower economic growth/recession)?
The interest rate the Federal Reserve charges commercial banks when they borrow money directly from the Fed's discount window.
What is the discount rate?
The general effect on consumer buying (car loans, credit cards, mortgages) when the Fed raises the Federal Funds Rate.
What is borrowing decreases (or buying slows down)?
How a stronger U.S. dollar typically impacts American export sales to foreign buyers.
What is exports decrease (they become more expensive for foreign buyers)?