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Monetary and Fiscal Policy

Monetary and Fiscal Policy

Author: Colton Cranston

This lesson covers the Monetary and Fiscal Policy

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Terms to Know
Contractionary Policy

Either monetary or fiscal policy that is enacted to slow economic growth (as measured by the GDP growth rate).

Expansionary Policy

Either monetary or fiscal policy that is enacted to stimulate economic growth (as measured by the GDP growth rate).

Fiscal Policy

Policy typically set by a central government authority whereby government spending is adjusted to stabilize economic activity.

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.

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 a 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.


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 seemingly impassable position.