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Monetary and Fiscal Policy

Monetary and Fiscal Policy

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Author: Colton Cranston
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This lesson covers the Monetary and Fiscal Policy
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Tutorial

Notes on "Monetary and Fiscal Policy"

Key Terms

Monetary Policy

Policy typically set by a central banking authority, whereby

money supply access and the resulting cost or access to money (interest rate), is

varied to assist in stabilizing economic activity.

Fiscal Policy

Policy typically set by a central government authority whereby

government spending is adjusted to stabilize economic activity.

Expansionary Policy

Either monetary or fiscal policy that is enacted to stimulate

economic growth (as measured by the GDP growth rate).

Contractionary Policy

Either monetary or fiscal policy that is enacted to slow

economic growth (as measured by the GDP growth rate).

Multiplier Effect

The sum total impact of a policy action on the economy; the

money multiplier is equal to the ratio of the reserve requirement, 1/rr, such that a

given reserve requirement will result in an net multiple of the original increase

equal to “ x the change in loanable funds.”

Phillips Curve

The graphical depiction of the inverse relationship between

inflation and unemployment; intuitively, higher employment (lower

unemployment) is consistent with a strong economy and demand, as demand

increases beyond short-run supply capabilities or resource constraints, inflation

begins to increase.

Stagflation

The situation where unemployment is high and inflation is high,

contrary to the Phillips curve; stagflation occurs when policy actions fail to boost

economic growth and the economy instead becomes stuck in a seeming

impassable position.