Econ Ch. 9-11 Test

Question 1

Refers to the arrangements that people have developed for trading with one another

Answer 1

Market

Question 2

The struggle firms experience as they seek to survive and thrive within the market

Answer 2

Competition

Question 3

A group of businesses that share common concerns: selling a similar product, serving a certain group of customers, or similarities of production

Answer 3

Industry

Question 4

4 Key differences in industries

Answer 4

1. The number of firms that make up the industry
2. Product differences (Honda and Toyota both sell cars, just not the same kind)
3. Control of Price (in some industries, companies can control individual price, some don’t have this control)
4. Entering/Exiting the Industry (how easy to do this)

Question 5

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

Answer 5

Perfect Competition

Question 6

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

Answer 6

Imperfect Competition

Question 7

“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

Answer 7

Oligopoly (ex. breakfast cereal manufacturers)

Question 8

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

Answer 8

Monopoly (ex. Florence City Utilities, Florence/Lauderdale Waste Department)

Question 9

What does the Sherman Anti-Trust Act say?

Answer 9

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

Question 10

What is the Clayton Act?

Answer 10

(1914) Closed gaps left by the Sherman Act. Prohibited interlocking directors, tying contracts, anti competitive takeovers, and price discrimination

Question 11

Anti-Trust legislation besides Sherman and Clayton Acts

Answer 11

• 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

Question 12

T/F Money is the root of all evil

Answer 12

False, the love of money is the root of all evil

Question 13

Anything a society commonly uses and generally accepts in payment for goods and services

Answer 13

Money

Question 14

Accepted money (must be accepted as declared by government)

Answer 14

Legal Tender

Question 15

Exchange of one person’s goods or services for another’s, used before standardized money system

Answer 15

Bartering

Question 16

Know about the money system on Yap Island

Answer 16

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).

Question 17

Desirable characteristics of money (4)

Answer 17

Convenience and Portability, Divisibility, Durability, Stability

Question 18

3 kinds of money

Answer 18

Commodity, Representative, Fiat

Question 19

Some single commonly used good becomes economy’s medium of exchange (ex. seashells, gold, salt)

Answer 19

Commodity money standard

Question 20

Money that represents a commodity that some entity holds in store

Answer 20

Representative Money

Question 21

Money that does not have gold or something of value backing it

Answer 21

Fiat money (US uses this)

Question 22

Difference in full-bodied and token coin

Answer 22

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.

Question 23

2 things that provide value to money

Answer 23

1) Faith that others will accept it

2) Limited quantity of money that exists

Question 24

Measure of money supply, attempts to measure money Americans have available for immediate spending

Answer 24

M-1

Question 25

Measure of money supply, represents money that consumers can immediately spend plus money available to spend after a short delay (savings accounts)

Answer 25

M-2

Question 26

Collection of organizations that assist households in channeling their money to businesses and the government

Answer 26

Financial Market

Question 27

What is the biggest participant in the financial market?

Answer 27

Commercial Banking Industry

Question 28

History of US Banking

Answer 28

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

Question 29

Financial Institution that accepts deposits and makes commercial loans

Answer 29

Commercial Bank

Question 30

Authorization to exist; required for a bank to open

Answer 30

Charter

Question 31

4 regulatory agencies of banks

Answer 31

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

Question 32

Functions of Commercial Banks

Answer 32

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)

Question 33

Began as financial institutions designed to collect savings and use capital to make loans

Answer 33

Savings and loan association

Question 34

Resemble savings and loans but have technicalities in their organization, exclusively in northeastern US

Answer 34

Mutual savings banks

Question 35

Originate with groups of people who have common interest

Answer 35

Credit Unions

Question 36

Why were district banks created?

Answer 36

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.

Question 36

Why were district banks created?

Answer 36

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.

Question 37

Who supervises district banks?

Answer 37

A board of directors

Question 38

Guides the Federal Reserve System, 7 members

Answer 38

Board of Governors

Question 39

Specified percentage of deposits in a bank

Answer 39

Reserve requirement

Question 40

Affects the money supply by buying and selling governmental securities such as treasury bills, notes, and bonds

Answer 40

Federal Open Market committee (FOMC)

Question 41

How is the IRS independent? (3)

Answer 41

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

Question 42

2 checks that keep the FRS from acting irresponsibly

Answer 42

1) congress may remove members from the Fed's Board of Governors 2) depends on congress for its existence

Question 43

Functions of the federal reserve system

Answer 43

1. Provide uniform currency-decide when to produce more money 2. Regulate member banks - financial institutions must abide by requirements 3. Clear checks and debit card transactions-check/debit clearing system 4. To act as nations fiscal agent-holds US treasury checking account, loans, supplies economic info 5. Serve as bankers bank-prevent financial panic and bank runs 6. Create money-increase money supply with money multiplier effect

Question 44

Money supply that can expand with the economy

Answer 44

Elastic currency

Question 45

Depositors rush to the bank seeking to withdraw all their money

Answer 45

Run on the bank

Question 46

Agency able to lend money to banks when a greater than expected number of depositors wants to receive cash from their accounts

Answer 46

Lender of last resort

Question 47

Expansion of money supply as a result of commercial banks lending their depositors money to others

Answer 47

Money multiplier effect

Question 48

How does the money multiplier effect work (p. 222-223)

Answer 48

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

Question 49

3 tools of creating money

Answer 49

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)

Question 50

Increasing or decreasing of money supply to influence economy

Answer 50

Monetary policy

Question 51

When concerned over high inflation, the Fed instills this to reduce money supply

Answer 51

Tight monetary policy

Question 52

When concerned over unemployment or recession, the Fed instills this to increase money supply

Answer 52

Loose monetary policy

Question 53

How does money supply effect interest rates and the economy

Answer 53

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

Question 54

What is FED policy trade off?

Answer 54

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.