Econ Ch. 9-11 Test Flashcards
Refers to the arrangements that people have developed for trading with one another
Market
The struggle firms experience as they seek to survive and thrive within the market
Competition
A group of businesses that share common concerns: selling a similar product, serving a certain group of customers, or similarities of production
Industry
4 Key differences in industries
- The number of firms that make up the industry
- Product differences (Honda and Toyota both sell cars, just not the same kind)
- Control of Price (in some industries, companies can control individual price, some don’t have this control)
- Entering/Exiting the Industry (how easy to do this)
Exists when there are many producers selling an identical product, no single firm controls price, and businesses find it relatively easy to enter and exit the market
Perfect Competition
Many producers of slightly differentiated goods, each firm ha some control over price and can exit/enter the market with ease; most prevalent form of competition in America
Imperfect Competition
“selling by few,” Contains few firms, products can be either highly differentiated or undifferentiated, great deal of control over price and difficult to enter/exit industry; mutual independence
Oligopoly (ex. breakfast cereal manufacturers)
Form of market organization i which there is only one supplier in the industry; no product differences, complete control of price, impossible for another firm to enter
Monopoly (ex. Florence City Utilities, Florence/Lauderdale Waste Department)
What does the Sherman Anti-Trust Act say?
Made trusts, conspiracies, contracts in form of trusts illegal. Made monopolies illegal. (1890) Led to the breakups of companies like Standard Oil and the American Tobacco Company
What is the Clayton Act?
(1914) Closed gaps left by the Sherman Act. Prohibited interlocking directors, tying contracts, anti competitive takeovers, and price discrimination
Anti-Trust legislation besides Sherman and Clayton Acts
- Federal Trade Commission Act (1914) to establish a Federal Trade commission to enforce Clayton act
- Robinson-Patman Act (1936) made it illegal for suppliers to hinder competition by selling at “unreasonably low prices”
- Celler-Kefauver Act/Antimerger Act (1950) made illegal for a firm to purchase assets of another firm to control market and lessen competition
T/F Money is the root of all evil
False, the love of money is the root of all evil
Anything a society commonly uses and generally accepts in payment for goods and services
Money
Accepted money (must be accepted as declared by government)
Legal Tender
Exchange of one person’s goods or services for another’s, used before standardized money system
Bartering
Know about the money system on Yap Island
Islanders on Yap use giant stones as means of money to purchase items. They are not convenient or portable, they are not divisible. They are durable. They are stable (in that society).
Desirable characteristics of money (4)
Convenience and Portability, Divisibility, Durability, Stability
3 kinds of money
Commodity, Representative, Fiat
Some single commonly used good becomes economy’s medium of exchange (ex. seashells, gold, salt)
Commodity money standard
Money that represents a commodity that some entity holds in store
Representative Money
Money that does not have gold or something of value backing it
Fiat money (US uses this)
Difference in full-bodied and token coin
A full-bodied coin is a coin that contains an amount of gold or silver equal to its face value, a token coin contains a quantity of metal less than its face value. US uses token coins.
2 things that provide value to money
1) Faith that others will accept it
2) Limited quantity of money that exists
Measure of money supply, attempts to measure money Americans have available for immediate spending
M-1
Measure of money supply, represents money that consumers can immediately spend plus money available to spend after a short delay (savings accounts)
M-2
Collection of organizations that assist households in channeling their money to businesses and the government
Financial Market
What is the biggest participant in the financial market?
Commercial Banking Industry
History of US Banking
1836-1864: Free Banking, no national bank system, individuals have private banks with minimal requirements by state –> hundreds of new banks and multiple types of bank notes/currency, counterfeiting, untrustworthy banks
During Civil War, National Banking Act established system of national banks and extended Dept. of Treasury control to issue uniform currency.
After Civil war, state and federally chartered bank institutions –> dual banking system
Commercial banks must receive a federal charter
Financial Institution that accepts deposits and makes commercial loans
Commercial Bank
Authorization to exist; required for a bank to open
Charter
4 regulatory agencies of banks
1) Comptroller of Currency- supervises and regulates only banks with national charters
2) Federal Reserve Bank- regulates state banks that are in the Federal Reserve System
3) Federal Deposit Insurance Corporation- state bank not in the FRS insured under this regulation
4) state banking authorities
Functions of Commercial Banks
1) Accept Deposits (ensure safety of these deposits)
2) Extend Loans
3) Provide Miscellaneous Services (debit/credit cards, traveler’s checks, cashier’s checks, safe deposit boxes)
Began as financial institutions designed to collect savings and use capital to make loans
Savings and loan association
Resemble savings and loans but have technicalities in their organization, exclusively in northeastern US
Mutual savings banks
Originate with groups of people who have common interest
Credit Unions
Why were district banks created?
Each section of the nation of the nation has diverse financial needs. Congress didn’t want any region to be at the mercy of another, so they divided them up into 12 districts across the nation. Supplies currency and coins to commercial banks.
Why were district banks created?
Each section of the nation of the nation has diverse financial needs. Congress didn’t want any region to be at the mercy of another, so they divided them up into 12 districts across the nation. Supplies currency and coins to commercial banks.
Who supervises district banks?
A board of directors
Guides the Federal Reserve System, 7 members
Board of Governors
Specified percentage of deposits in a bank
Reserve requirement
Affects the money supply by buying and selling governmental securities such as treasury bills, notes, and bonds
Federal Open Market committee (FOMC)
How is the IRS independent? (3)
1) politically independent (board of governors terms expire after 2 years-president can’t control it)
2) financially independent (has its own budget)
3) operationally independent
2 checks that keep the FRS from acting irresponsibly
1) congress may remove members from the Fed’s Board of Governors
2) depends on congress for its existence
Functions of the federal reserve system
- Provide uniform currency-decide when to produce more money
- Regulate member banks - financial institutions must abide by requirements
- Clear checks and debit card transactions-check/debit clearing system
- To act as nations fiscal agent-holds US treasury checking account, loans, supplies economic info
- Serve as bankers bank-prevent financial panic and bank runs
- Create money-increase money supply with money multiplier effect
Money supply that can expand with the economy
Elastic currency
Depositors rush to the bank seeking to withdraw all their money
Run on the bank
Agency able to lend money to banks when a greater than expected number of depositors wants to receive cash from their accounts
Lender of last resort
Expansion of money supply as a result of commercial banks lending their depositors money to others
Money multiplier effect
How does the money multiplier effect work (p. 222-223)
D x 1/rr = increase in money supply
Money goes to the bank and the bank holds the reserve requirement and lends out the rest. The cycle continues, creating money through lending.
Ex.
10,000 x 1/.10 = 100,000
3 tools of creating money
1) changing discount rate- lending money to banks.
2) changing reserve requirement- lower requirements to increase money, raise requirements to decrease money
3) use open market operations- controls amount of money in circulation. Fed sells or buys governmental securities (increase= purchases bonds, decrease= sell bonds)
Increasing or decreasing of money supply to influence economy
Monetary policy
When concerned over high inflation, the Fed instills this to reduce money supply
Tight monetary policy
When concerned over unemployment or recession, the Fed instills this to increase money supply
Loose monetary policy
How does money supply effect interest rates and the economy
Money supply grows more quickly than the growth of goods and products, inflation occurs.
Money grows slower than production of goods, not enough money in circulation. May lead to recession
What is FED policy trade off?
If the Fed produced money continually, demand would rise and exceed supply. The goods produced would rise in pride and buyers would become frantic. This is “overheating.” To “cool down” the fed decreases the growth rate of money supply to cause interest rates to rise discouraging businesses from borrowing extra funds. If it cools down too much, the businesses may start having to lay off people and a recession would ensue.
