Chapter 4: Making Economic Policy Part A Flashcards
1
Q
What are two problems modern presidents have to deal with today?
A
High prices which lead to decreased buying powers (inflation)
Rising unemployment (recession)
2
Q
What is the key to dealing with these modern problems of inflation and recession?
A
interest rates
3
Q
Who are considered modern presidents?
A
FDR - forward
4
Q
Explain the old view…
A
Political leaders took the view that flex stations between good and hard times were natural and that the government should not interfere
5
Q
What presidents were part of the old view?
A
Washington - Hoover
6
Q
When was the use of government power to manage the economy first considered?
A
The great depression
7
Q
Since the old he was first introduced many Americans have come to believe…?
A
that the central government should have devised economic policies to ensure good living conditions for all Americans
8
Q
T OR F
Unlike foreign policy which is the concern of all Americans along with the central government, economic policy is influenced by solely the central government.?
A
FALSE
Unlike foreign policy which is solely the concern of the central government, economic policy is influenced by all Americans
9
Q
What are the three necessities of life?
A
food
shelter
clothing
10
Q
What is it called where money good and services flows from one part of the system to another?
A
Circular system
11
Q
What do two things was the heart of the circular system?
A
- consumers to buy goods and services from producers
- producers who use that money to buy labor and resources
12
Q
In what three ways does money also flow in the circular system?
A
- Banks and other financial institutions
- foreign governments
- our government
13
Q
Explain the following statements… Being circulate money throughout the economy. Most of American life is based off of borrowed money
A
producers borrow money to buy supplies and pay workers. Also, consumers borrow money to buy homes and such
14
Q
What are the two forms of interest?
A
- The amount the borrower must pay the bank for the privilege of borrowing
- The amount banks pay to savers for the privilege of using their money
15
Q
In order to lend money, the bank must get money and they do this through which two sources?
A
depositors and the federal reserve
16
Q
What is structural inflation caused by?
A
A temporary shortage in a commodity
EX: crop failure, silver, gold, coffee, oil, sugar
17
Q
In the 1970s what two things did America experience?
A
Serious recession and structural inflation
18
Q
What is the combination of recession and structural inflation called?
A
Stagflation
19
Q
What are the two roles the government has an economic system?
A
- fiscal policy
- monetary policy
20
Q
What includes how much money government will spend, where it will spend it, and how it will get the money?
A
Fiscal policy
21
Q
What is another name for fiscal policy?
A
budget
22
Q
What determines how much money will be worth by deciding how much is put into circulation?
A
monetary policy
23
Q
T or F
All paper money is made at the burrows of mints whereas all coins are made at the burrow of engraving and printing.
A
FALSE
all paper money is made at the borrow of engraving and printing whereas all coins are made at the borrows of mints
24
Q
To accomplish the goal formulating economic policy, the president gets help from what three places?
A
- Council of economic advisers\CEA
- Office of management and budget\OMB
- Federal reserve
25
To help the president manage the economy, advisers pay attention to what three factors?
- Labor situation
- GNP\GDP
- Prices
26
Each month labor department reports on what two things?
Employment unemployment amongst various groups of Americans
27
An increase in employment is _________ and a decrease in employment is __________?
positive
negative
28
What are two weapons that can be used to facilitate the labor situation?
- interest rates
| - Jobs programs ( use for recession not inflation)
29
Explain how interest rates are weapon used to facilitate the labor situation…
If the economy is drifting toward inflation, raise interest rates so people are discouraged from borrowing and less money is circulated so inflation can be lowered
If you come to me is drifting towards your session, lower the interest-rate to encourage people to buy more show more jobs are created in our session is lowered
30
What is the final market price of all goods and services produced in a country?
GDP/GNP
31
A higher GNP means the economy is…?
A lower GNP means the economy is...?
growing
contracting and people are losing jobs
32
What are three weapons used to manipulate GNP\GDP?
- interest-rates
- tax laws
- manipulate the value of the dollar
33
How are interest rates used to Weaponized GNP\GDP?
If the economy is contracting, lower interest rates to encourage borrowing
If the economy is expanding, raise interest rates to discourage borrowing
34
How are tax laws used to Weaponized GNP\GDP?
If the economy is heading to inflation, increased taxes to take in money
If the economy is heading toward recession, decrease taxes to encourage spending
35
How is manipulation of the value of the dollar used to Weaponized GNP/GDP?
If you raise the value of the dollar, you will have more important exports so this can be used to control inflation and excourage borrowing
If you decrease the value of a dollar, you will have less imports and exports so it can be used to control recession and encourage borrowing
36
How are prices measured?
Consumer price index\cpi
37
What has led to the reduction of the buying power since 1967?
inflation
38
What are two things that can be Weaponized to manipulate prices?
interest rates and manipulating the value of the dollar
both should be increased
39
What are three agencies that help manage the economy?
- Council of economic advisers\CEA
- Office of management and budget
- Federal reserve
40
What did the Council of economic advisers gives the government the power to do?
It gave the government the right to keep the economy running smoothly
41
The Council of economic advisers includes how many members and how does one become a member?
and includes three members… The President appoints them in the Senate approves them
42
What are the three functions of the Council of economic advisers?
- economic analysis and forecasting
- policy advice
- education
43
What are the two functions of the office of management and budget?
- makes the government’s budget
| - ?
44
What is the plan of income and expenditures?
budget
45
What does the office of management and budget recommend to stimulate the economy and explain it?
They recommend deficit spending. This means borrowing money which now accounts for over $22 trillion owed to creditors
46
Explain what is wrong with the following statement… The budget process begins 18 months before goes into affect.
This is a problem because conditions can change within the time. Which then makes recommendations invalid
47
What develops monetary policy?
The federal reserve
48
How was the nation divided?
The nation is divided into 12 districts with federal reserve bank in each
49
T OR F
All federally chartered banks must belong to the federal reserve as well as state-chartered banks.
FALSE
All federally chartered beings must belong to the federal reserve, but state chartered banks have an optional membership
50
What must member banks do to just be in good standing with the federal reserve?
Member beings must a positive percentage of their cash with the federal reserve as collateral
51
How many members make up the federal reserve and how did they become members also how long are the terms?
The federal reserve consist of seven members
appointed by the president and confirmed by the Senate
they all have a 14 year term aside from the chairman of the board who has a four-year term
52
T or F
The federal reserve is an independent agency so it does not have to do with the president asks or wants, yet it usually does.
TRUE
53
What is the main function of the Federal Reserve?
To supply cash and keep the economy stable
54
What are the three weapons the federal reserve uses to control money flow into the economy?
- Open market operations
- adjust reserve requirements
- change discount rates
55
What is the buying and selling of government bonds?
Open market operations
56
How does the federal reserve Weaponized open market operations to control money flowing to the economy?
- when they buy bonds, that increases the money supply
• this causes the cost of money to go down and attacks recession
- when they sell bonds, that decreases the money supply
• this causes the cost of money to go up and attacks inflation
57
What does it mean to adjust reserve requirements?
this means to increase or decrease the amount of money member brings have to put up/deposit with the federal reserve
58
How does the federal reserve Weaponized the adjustment of reserve requirements to control money flow into the economy?
- if the rate is increased, interest rates rise and inflation is attacked
- if the rate is lowered, interest rates decrease and recession is attacked
59
What is the rate the federal bank charges?
discount rate
60
Explain the old business cycle...
1) Prosparity
- Inflation occurs
(INBETWEEN)
~ Inventory build up
~ Layoffs
2) Panic
- Recession occurs
• 7 1/2 - 10% unemployment
(INBETWEEN)
~ Cooling Off
3) Depression
- Deflation occurs
• 10% + unemployment
(INBETWEEN)
~ Inventory selloff
~ More hiring of workers
4) Recovery
(INBETWEEN)
~ Heating Up
1) Prosparity (repeat)
61
What is the basic difference between the old business cycle and the new business cycle?
There is no depression and the new business cycle only recession
62
What are the key weapons to the new business cycle?
raise interest
decrease rates
63
Explain the new business cycle…
1) Prosparity
2) Recovery
3) Recession
- Inflation (never kill inflation just wound it)
REPETE
64
What is it called where the bank borrows it’s money?
The discount window
65
Where do banks prefer to get their money from and why?
Thanks preferred to get the money from depositors because they have to pay a higher interest-rate to the federal reserve
66
What is it called when the banks loan out money?
Prime rate
67
Which is always higher the prime rate or the discount rate and why?
The prime rate is always higher because the banks need to make a profit
68
How does trade with other foreign nations work in America?
American consumers buy goods from foreign nations of money flows out of the US
69
What is the difference between exports and imports?
balance of trade
70
What is another word for the following statements… The US has not had a positive balance of trade since 1960.
deficit balance
71
What is the desired goal regarding trade with other nations and what will reaching this goal do for the economy?
The desired goal is to increase exports. By lowering the value of the American dollar against foreign currency’s, exports will increase. A higher dollar means more imports.
72
What provides producers and consumers with services in exchange for tax money?
Governments
73
What three things does the government do?
- provides producers and consumers with government services in exchange for tax money
- pays money to employees
- spends money to purchase goods and services to carry out its duties
74
What is it called when money is spent to purchase goods and services to carry out its duties?
Government contract
75
T OR F
In the real world, money, goods, and services flow evenly.
FALSE
In the real world, money, goods, and services do not flow evenly. Dislocations appear. Too much money may pile up or too many goods
may accumulate
76
What is it called when too many goods accumulate?
inventory build-up/recession
77
What is it called when to much money piles up?
inflation
78
What is the following in example of… As more money flows out of the country to pay for imported oil, there was less money available to buy American products. Goods then begin to accumulate in producers wearhouses. Producers then slow production which led to layoffs. Orders and begin to draw money from their savings accounts to pay their bills. As a result, beings have less money to loan.
This is a recession
79
What should be done to help fix a recession?
In a recession, interest-rate should be lowered. This way people will borrow money to spend and create jobs in the market.
80
What should be done to fix an inflation?
Inflation calls for raised interest rates which will discourage people from borrowing money.
81
What are the four parts of the old business cycle?
- recession
- depression
- recovery
- Prosparity
82
What is a period of decline in business activity?
recession
83
What is it called when people try to get all their money all at once?
panic
84
Bank panics often leads to what?
bank closures
85
What is a prolonged period of low business activity?
depression
86
What occurs during depression?
deflation
87
What is the decrease in the price of goods and services?
deflation
88
Deflation is good for _______ but bad for _______.
deflation is good for consumers but bad for producers
89
What is the period of increasing business activity?
recovery
90
What occurs during a period of recovery?
all inventory is sold off. Producers begin to hire back workers and start producing. Unemployment begins to rise.
91
What is the period of prolonged high business activity?
Prosparity
92
What occurs during a period of prosperity?
inventory build up and inflation ultimately occurs
93
What is it called when producers are making more than consumers are buying?
inventory build up
94
What are the three types of inflation?
- demand pull
- cost push
- structural inflation
95
What is caused by too much money chasing too few goods?
demand pull inflation
96
what is the most serious type of inflation and what is it caused by?
demand pull which is caused by government printing
97
What is the rising cost of making goods without an increase in productivity which ultimately pushes prices up called?
cost push inflation
98
What occurs during cost push inflation?
workers demand higher wages without being more efficient. Therefore, producers are forced to raise prices.
99
Heating up means your heading towards what?
inflation
100
Cooling off means you’re heading towards what?
recession
101
Job should only be created when you are in…?
recession
102
A higher dollar will _____ exports and _______?
A higher dollar will reduce exports and inflation
103
A lowered dollar reduces…?
Recession
104
What is the most important function of the Council of economic advisers\CEA?
economic analysis and forecasting
105
Unemployment is at its highest peak in the cycle during the period of…?
Panic 10% +
