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fiscal policy
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the government's use of spending and taxes to make the economy grow faster or slower
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national debt
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the total amount of money the federal government owes to all bondholders
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federal budget
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a written document that estimates how much money the federal government will take in and spend in a year
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crowding-out effect
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the loss of funds for private investment that are caused by government borrowing
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multiplier effect
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the idea that every one dollar change in fiscal policy creates a change greater than one dollar in the national income
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wage-price spiral
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a pattern of higher prices leading to more inflation and then to a round of higher wages, repeated over and over
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poverty threshold
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an income level below which income is not high enough to support a family or household
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price index
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a measurement that shows the average price of a group of goods
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frictional unemployment
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unemployment that happens when people must search for a long time to find a job
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income distribution
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the way the nation's total income is spread out among its population
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structural unemployment
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unemployment that happens when workers' skills do not match those needed for the jobs available
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purchasing power
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the ability to buy goods and services
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unemployment rate
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the percentage that measures the number of unemployed people looking for jobs
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deflation
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a general drop in the price level
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workfare
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a program requiring work in exchange for government help
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monetary policy
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the decisions the Fed makes about money and banking
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prime rate
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the interest rates banks charge their best customers
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money creation
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the process of manufacturing currency and putting it into use
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open market operations
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the buying and selling of government securities in order to alter the supply of money
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excess reserves
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reserves that are more than the required amounts
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discount rate
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the rate that the Fed charges banks for loans to banks
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tight money policy
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a monetary policy that reduces the money supply
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monetarism
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the belief that the money supply is the most important factor in the entire economy
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outside lag
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the time it takes for monetary policy to have an effect
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easy money policy
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a monetary policy that increases the money supply
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To speed up the economy, to bring the economy out of a recession or down turn by adding more money to peoples pockets... causing them to spend more.
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Why does the government sometimes use an expansionary fiscal policy?
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To develop the president's budget.
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What is the role of the Office of Management and Budget?
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active involvement
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What did John Maynard Keynes believe should be the government's role in the economy?
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It lacks flexibility in the case of a national emergency like war, attack or natural disaster.
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What is a major argument against a constitutional amendment requiring a balanced budget?
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We spend a lot of money servicing the debt (paying interest) that could be better used in other places.
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What is one of the major problems caused by a high national debt?
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taxes
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An example of expansionary fiscal policy would be cutting __________.
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Politicians may think about short term economic gains to get reelected rather than long term economic impacts.
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What impact can political pressures have on fiscal policy?
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It would cause inflation.
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What is a major reason that the federal government does not reduce the budget deficit by printing more money?
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The deficit is a shortfall of cash, while the debt is the loan to cover it.
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Which of the following best describes the relationship between a budget deficit and the national debt?
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Decreased demand for goods causes demand for labor to go down.
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Why does unemployment rise when the economy slows?
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There is no cyclical unemployment.
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What does full employment mean?
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Employment is increased.
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What is considered one cause of inflation?
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Low unemployment leads to more money in the economy.
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Why does low unemployment often lead to inflation?
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food and necessary services for any family
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The consumer price index measures the prices of certain items each month. Which items are measured?
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A dollar had more purchasing power when he was young.
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Jessie's grandfather tells him that a dollar went farther when he was a child than it does today. What does he mean?
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Their income will not increase, so their purchasing power falls.
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What problem does inflation cause for people living on fixed incomes?
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Divide the number of unemployed people by the labor force, and multiply by 100.
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How is the unemployment rate determined?
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borrowing money from the Fed
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What is one service the Fed provides to all banks?
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the federal government
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Which is the Federal Reserve's biggest customer?
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To maintain their reserve requirements.
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What is one reason commercial banks sometimes borrow money from the Fed?
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It can be disruptive to the whole banking system.
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Why does the Fed rarely change the reserve requirements?
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Buying and selling government securities.
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What monetary policy does the Fed use the most to change the money supply?
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Buy government securities.
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What can the Federal Open Market Committee do to increase the money supply?
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It is cheaper to borrow money when interest rates are low.
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Why do low interest rates encourage business investment?
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Introduce an easy money policy.
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If economists predict that the economy is facing a long recession, what would the Fed be most likely to do?
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It makes key decisions about interest rates and the growth of the United States money supply.
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What is the role of the Federal Open Market Committee?
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tight money
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What type of policy should the Federal Reserve use to counteract a rapid expansion that is causing high inflation?
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Buy government securities so banks will increase lending.
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What action would the Federal Reserve be most likely to take in response to a period of contraction?
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To allow the bank to maintain required reserves.
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Why might the Federal Reserve make an emergency loan to a bank?
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When interest rates increase, demand for loans decreases.
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What is the relationship between interest rates and the demand for loans?
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It can reduce the discount rate.
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What can the Federal Reserve do to encourage banks to lend more money?
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Banks would have less money to lend.
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What would happen if the Federal Reserve increased reserve requirements?
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To control the amount of money in circulation.
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Why does the Federal Reserve set the reserve ratio?
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