| A | B |
|---|
| Causes for the Panic of 1907 | (1)No system for expanding money in circulation (2)system of pyramided reserves failed |
| Purpose/Role of the Fed | (1)Supervise member banks (2)Hold cash reserves (3)Move money into or out of circulation |
| Characteristics of the Fed | (1)Relies on district banks to carry out its banking policies **Has flexibility to design policies to meet their district’s need** (2)U.S. Government doesn’t own stock in the Fed.—independent—does report to Congress (3)Nationally chartered banks are required to join—state-chartered banks have the option to join or not to join |
| Organization of the Fed | (1)Made up of Board of Governors, (2)FOMC (3) 12 reserve banks |
| Goals of the Fed | (1) Provides services to banks (2) Provides services to the government |
| monetary policy | plan to expand or pull back (contract) the money supply in order to influence the cost and availability of credit |
| M1 | (1)Simplest measure (2)Used by economists that believe the money supply should consist of easily accessible funds (3)value of all currency in circulation + value of traveler’s checks + all checking accounts in financial institutions |
| M2 | (1)Broader measure (2)Used by economists that believe that M1 doesn’t include all readily available funds (3) equals M1 + money market accounts + money market mutual funds + CDs under $100,000 |
| M3 | (1)Used by economists that believe that M2 doesn’t measure money supply accurately (2) equals M2 + CDs over $100,000 and other deposits in U.S. dollar banks out of the country |
| easy money policy | (1)Fed charges banks a lower interest rate to borrow money (2)Results makes more money available to those banks (3)Usually adopted during a recession (4)Helps boost the economy |
| tight money policy | (1)Slows business activity and helps to stabilize prices (2)Usually adopted if Fed believes inflation (demand pull) is likely to happen (3)Characterized by higher interest rates |
| If Fed lowers interest rates to member banks | banks charger lower interest rates to customers and customers demand more goods--aggregate demand increases |
| If Fed raises interest rates to member banks, | Banks charge higher interest rates to customers, customers delay buying goods and services--aggregate demand decreases |
| 3 components of monetary policy | (1)Open-Market Operations (2)The Discount Rate (3)The Reserve Requirement |
| prime rate | the interest rate that commercial banks charge on loans to their best customers |
| 5 challenges/obstacles the Fed faces | (1)Economic Forecasts (2)Time Lags (3) Priorities and Trade-offs (4)Lack of Coordination (5)Conflicting Opinions |
| fiscal policy | spending, taxing and borrowing policies |
| 3 tools of fiscal policy | taxes, loans, government spending |
| 3 kinds of taxes | (1)Proportional, (2)Progressive, (3)Regressive |
| supply side economics | Focuses on achieving economic stability and growth by increasing the supply of goods and services in the economy--government provides businesses incentives to increase production |
| demand side economics | Focuses on achieving economic growth through the government’s influence on aggregate demand |
| Beliefs of supply side economics | (1)Government should have a laissez-faire approach (2)Government should reduce taxes (3)Government regulations get in the way of economic growth |
| Beliefs of demand side economics | Government should use fiscal policy to: (1)Fight economic downturns (2)Curb unemployment (3)Stablize rising prices |
| Father of demand side economics | John Maynard Keynes |
| Leading supporter of supply-side economics--Said, "Supply creates its own demand" | Jean Bapiste Say |
| federal budget | federal government’s plan for the use of government revenues |
| national debt | the total amount of money that the federal government has borrowed, and includes all deficits from previous years |
| Impact of the National Debt | (1) Helps keep government programs going (2)Helps citizens--may improve their quality of life (3)Costs are severe (4)We are paying billions of dollars in interest on it |
| Ways to Balance the Federal Budget | (1)Increase Revenues (2)Decrease Expenses |
| Impact of Increasing Revenues | (1)Not popular with voters (2)Hurts middle class |
| Impact of Decreasing Expenses | (1)Not popular with voters (2)May cut programs/benefits for citizens--hurting many Americans who need those program |
| What policies could Congress enact to reduce inflation? | adopy a tight money policy--this would (1)Contract (slow down)the money supply (2)Decrease aggregate demand--slowing inflation |
| What policies could Congress enact to reduce unemployment? | adopt an easy money policy--this would (1)Expand the money supply (2)Increase aggregate demand (3)Create jobs and (4)reduce unemployment (5)Promote economic growth |
| Public transfer payment examples | social security, unemployment, welfare, federal student loans |
| absolute advantage | when one country can produce a certain good more efficiently than their trading partner |
| comparative advantage | figuring out where the greatest absolute advantage occurs for each country—key is tradeoffs |
| foreign exchange market | a market in which the currencies of different nations are bought and sold |
| What is bought and sold on the foreign exchange market? | foreign currencies |
| What are the goals of the IMF? | (1)To promote international monetary cooperation, (1)Stabilize currency and international trade |
| The impact of the U.S. dollar appreciating in value? | Pros:(1)It is cheaper for U.S. businesses to import from foreign countries because the dollar is strong so foreign goods and services will cost less. The consumer will benefit from this since import prices on goods would go down. (2)It would be cheaper for U.S. citizens to travel abroad since the consumer would be getting more for their U.S. dollars. This usually makes things like food, hotels, and souvenirs cost less Cons: (1)Foreign businesses are less likely to import from the United States because they can trade more goods for their money with a different country that has a currency weaker than the dollar. (2)The U.S. is less likely to export goods when the dollar is strong; thus, foreign demand for goods will decrease. When this happens, it tends to hurt American companies by reducing their international sales. (3)Generally, a foreign country will buy agricultural exports cheaper from a country with a weaker currency exchange rate than the U.S. dollar. The result is that American farmers will develop a surplus of crops, which may lead to lower prices. Getting less for what they produce is a disadvantage to farmers. (4)The U.S. trade deficit increases since we are importing more than we are exporting. |
| Impact of rising interest rates in the U.S. on foreign trade? | If interest rates are high in the U.S., other countries will invest in the U.S, however if interest rates are low in the U.S., other countries won’t invest in the U.S.—they’ll invest elsewhere |
| balance of trade | the difference between a nation’s imported and exported products |
| Ways government may keeps job and industries from moving out of the country | enact trade barriers |
| trade barrier | government actions that are designed to protect domestic industries and jobs from foreign competition |
| Examples of trade barriers | tariffs, voluntary restricitons, import quotas, embargos |
| embargo | Law that cuts off imports from and exports to a specific country |
| Most common reason for an embargo | political reasons |
| trade agreements | a pact/or arrangement between two countries concerning their trade relationships |
| Most significant trade agreements | GATT/WTO |
| protectionism | the belief that tariffs should be used to protect and favor domestic industries |
| free trade | belief that trade shouldn't be subject to government regulation and that exports and imports should flow freely between countries |
| Free trade position | (1)Believe competition makes for better use of resources and incentives for business efficiency (2)Worry temporary protective measures will be extended indefinitely (3)Believe trade barriers reduce unemployment U.S. trade barriers caused other countries to put up barriers as well (4)Barriers hurt U.S. businesses in the world market—reduces American jobs (5)Benefits the world economy (6)Competition guarantees the best product at the best price (7)An economy based on a single product isn’t as strong as a diversified economy (8)Some industries must be protected from foreign competition and failure—steel, technology and energy-based industries (9)Still prefer limited trade barriers |
| Protectionism position | (1)New industries should be protected from foreign competition They new industries will then have time to build up a strong domestic market (2)More companies can compete in the domestic market (3)More jobs for domestic workers (4)Encourages businesses to overspecialize (5)Overspecialization can hurt the country’s economy in changing world demand (6)Businesses should produce a wide variety of products (7)Some industries must be protected from foreign competition and failure—steel, technology and energy-based industries (8)Don’t think any countries truly allow free trade |
| trade deficit | When a nation imports more than it exports |
| trade surplus | When a nation exports more than it imports |
