Objectives of Fiscal and Monetary Policy Free Online FlashCards

What is fiscal policy?

Fiscal policy is set by governments through taxation, public spending, and transfers.

What are the three broad functions of fiscal policy?

Its broad functions are economic stabilization, providing public goods and services or addressing market failures, and shaping distribution and opportunity.

What are automatic stabilizers?

Automatic stabilizers are fiscal effects that support incomes without a new policy decision, such as falling tax payments and rising eligibility for some benefits during a recession.

What is a budget deficit, and what can repeated deficits add to?

A budget deficit occurs when government spending exceeds revenue over a period. Repeated borrowing adds to public debt and can raise future interest costs.

What is monetary policy?

Monetary policy is conducted by a central bank, which influences interest rates and broader financial conditions.

What objectives does Congress give the Federal Reserve?

Congress directs the Federal Reserve to promote maximum employment and stable prices; the law also refers to moderate long-term interest rates.

What longer-run inflation goal does the Fed judge consistent with price stability?

The Fed judges that 2 percent inflation over the longer run, measured by the annual change in the PCE price index, is consistent with its price-stability mandate.

Why is maximum employment not a fixed numerical target?

Maximum employment is not a fixed numerical target; it depends on changing economic and labor-market conditions.

How can lower policy rates support demand and employment?

Lower rates generally make borrowing cheaper, encouraging household spending and business investment and thereby supporting demand and employment.

How can higher policy rates ease inflationary pressure?

Higher rates tend to restrain borrowing and spending, easing demand and inflationary pressure.

Why must central banks consider the future path of the economy?

Monetary policy influences decisions indirectly and with delays; rate changes do not directly set wages, prices, or job numbers.

Why can a supply shock complicate stabilization policy?

A supply shock, such as a sudden rise in energy costs, can raise inflation while weakening economic activity, making policy choices especially difficult.