Fiscal Policy Basics
What is fiscal policy?
Government uses taxes and spending to influence the economy
What is the Federal Reserve?
The U.S. central bank that controls the money supply
What is inflation?
A general rise in prices over time
What is mandatory spending?
Spending required by law such as Social Security
What is stabilization policy?
Policies aimed at smoothing the business cycle
This type of policy increases spending or cuts taxes during a recession
What is expansionary fiscal policy?
What are open market purchases?
Buying government bonds to increase the money supply
What is deflation?
A decrease in overall price levels
Spending that is decided each year in the budget process
What is discretionary spending?
What is expansionary policy?
Using higher spending and lower taxes to boost the economy
What is contractionary fiscal policy?
This type of policy reduces spending or raises taxes to fight inflation
What are open market sales?
Selling government bonds to decrease the money supply
What is disinflation?
Inflation that slows but prices still rise
What are transfer payments?
Payments made without receiving goods or services in return
What is contractionary policy?
Using lower spending and higher taxes to cool inflation
What is a budget deficit?
This occurs when government spending is greater than tax revenue
What is the federal funds rate?
The interest rate banks charge each other overnight
What is hyperinflation?
Extremely rapid and out of control inflation
What are automatic stabilizers?
Programs that increase spending during downturns automatically
What are automatic stabilizers?
Policies that take effect without new legislation
What is a budget surplus?
This occurs when tax revenue is greater than government spending
What are interest rates?
Lowering this encourages borrowing and spending
What is a recession?
A period of economic decline with falling output and rising unemployment
What is Social Security?
The largest category of mandatory spending in the U.S.
What is a policy lag?
The time it takes for a policy to impact the economy