Glossary
Budget Deficit
Occurs when government spending exceeds government tax revenue in a single fiscal year.
Example:
If the government spends 3.5 trillion in taxes in a year, it has a $0.5 trillion budget deficit.
Contractionary Fiscal Policy
Government policy that decreases spending or raises taxes to slow down economic growth and reduce inflation.
Example:
If the economy is overheating with high inflation, the government might implement contractionary fiscal policy by reducing its spending on certain programs.
Contractionary Monetary Policy
Central bank actions that raise interest rates or decrease the money supply to slow down economic growth and combat inflation.
Example:
When inflation is a concern, the Fed might implement contractionary monetary policy by selling government bonds, which reduces the money supply.
Crowding Out
A phenomenon where increased government borrowing to finance a budget deficit raises interest rates, thereby reducing private investment and consumption.
Example:
When the government borrows heavily, it can lead to crowding out, making it more expensive for businesses to borrow money for new factories.
Economic Growth
An increase in the production of goods and services over time, typically measured by the increase in real GDP.
Example:
Innovations in technology and increased worker productivity are key drivers of long-term economic growth.
Equation of Exchange
The equation MV = PQ, which relates the money supply (M) and its velocity (V) to the price level (P) and the quantity of output (Q).
Example:
Using the Equation of Exchange, if the money supply doubles and velocity and output remain constant, the price level must also double.
Expansionary Fiscal Policy
Government policy that increases spending or cuts taxes to stimulate economic growth and increase aggregate demand.
Example:
During a recession, Congress might pass a bill to send out stimulus checks, which is a form of expansionary fiscal policy.
Expansionary Monetary Policy
Central bank actions that lower interest rates or increase the money supply to stimulate economic growth and increase aggregate demand.
Example:
To encourage borrowing and investment, the Fed might engage in expansionary monetary policy by buying government bonds.
Fiscal Policy
Government actions involving spending and taxation to influence the economy.
Example:
When the government decides to build a new highway, it's an example of using fiscal policy to boost economic activity.
Fiscal Restraint
Contractionary fiscal policy measures, such as decreased government spending or tax increases, aimed at slowing down economic growth or reducing inflation.
Example:
To curb rising inflation, a government might implement fiscal restraint by cutting back on public works projects.
Fiscal Stimulus
Expansionary fiscal policy measures, such as increased government spending or tax cuts, aimed at boosting economic growth.
Example:
During the 2008 financial crisis, the government passed a large package of fiscal stimulus to prevent a deeper recession.
Long-Run Phillips Curve (LRPC)
A vertical line at the natural rate of unemployment, indicating that in the long run, there is no trade-off between inflation and unemployment.
Example:
Regardless of the inflation rate, the economy will always return to its natural rate of unemployment in the long run, as depicted by the vertical Long-Run Phillips Curve (LRPC).
Monetary Policy
Actions taken by a central bank, like the Federal Reserve, to control the money supply and interest rates to influence the economy.
Example:
The Federal Reserve's decision to raise or lower the federal funds rate is a key tool of monetary policy.
National Debt
The total accumulation of all past annual budget deficits minus any surpluses; it represents the total amount of money the government owes.
Example:
The sum of all the U.S. government's outstanding borrowings from past years constitutes the national debt.
Phillips Curve
A model illustrating the short-run inverse relationship between inflation and unemployment.
Example:
Economists often refer to the Phillips Curve when discussing the trade-off policymakers face between trying to reduce unemployment and controlling inflation.
Quantity Theory of Money
A theory stating that the quantity of money available determines the price level and that the growth rate in the quantity of money determines the inflation rate.
Example:
The idea that printing too much money leads to inflation is a core concept of the Quantity Theory of Money.
Short-Run Phillips Curve (SRPC)
A downward-sloping curve showing that in the short run, lower unemployment is associated with higher inflation, and vice versa.
Example:
If the government stimulates aggregate demand, the economy moves up along the Short-Run Phillips Curve (SRPC), leading to lower unemployment but higher inflation.
Supply-Side Fiscal Policies
Fiscal policies, often tax cuts for businesses and individuals, designed to increase aggregate supply by encouraging production and investment.
Example:
A government might implement supply-side fiscal policies by reducing corporate income taxes, hoping to incentivize companies to invest more and create jobs.
Velocity of Money
The average number of times a unit of currency is spent on new goods and services in a given period.
Example:
If a $20 bill is used to buy groceries, then a movie ticket, and then a book all within a month, its velocity of money for that month is 3.