Exam 3 😞 Flashcards
How is the federal budget created?
1) in January or February the president submits a budget to congress for the fiscal year, which begins Oct 1st
2) presidents council of economic advisors sends a report to congress on the economy
3) budget committees in the house and senate rework the budget
4) a budget resolution is created and voted on by congress
Problems with budget processes
1) continuing resolutions are often passed instead of a budget
2) the length of time needed to create a budget
3) uncontrollable budget items
4) no separate capital budget
5) Overly detailed budget
Possible Budget reforms
1) create a one year budget
2) simplify the process by granting agencies more spending discretion
3) create an operating budget and a capital budget
Budget and deficit philosophies
1) the budget should be balanced annually
2) maintain a cyclically balanced budget
3) functional finance
Problems with the budget and deficit philosophies
Balanced budget-risk tipping a weak economy into recession
Evolution of debt
1) between 1789 and 1930 the budget was in deficit 33% of the time
2) since the Great Depression we have had deficits 85% of the time
3) the 1980s brought large deficits during the Reagan years
4) during the 1990s we began to generate a surplus
5) the recessions, tax cuts, spending increase of the bush years provoked large deficits
6) spending to bail out banks and control the recession has significantly increased the debt
Impact of the federal debt
1) the amount owed domestically is partially beneficial
2) the amount owed to foreign countries drains our resources
3) debts cause interest rates to increase
4) debts crowd out private investment
5) debts reduce future spending on domestic needs
Ideal properties of money
1) durable
2) portable
3) divisible
4) uniform quality
5) low opportunity cost
6) stable value
How banks open
1.a charter must be obtained from the state bank or from the national
2.investors buy shares in the bank
3. the bank must purchase stock in the local federal reserve bank
4. banks purchase capital stock ( building, furniture, etc)
Open market operations
1)when the fed buys a bond from the public or from a bank the banking systems lending capacity and the money supply will increase, and when the fed sells a bond to the public or bank, the money supply will decrease
Interest rate influence by the federal reserve
1)federal funds trade; the interest rate that banks charge each other for overnight borrowing
2)discount rate; the interest rate that the fed charges banks that borrow reserves
3)consumer interest rates
What caused the budget surplus of the 90s?
Higher tax rates on the wealthiest Americans, strong economic growth and continued restraint in government spending produced a budget surplus of US$69 billion in 1998.
What ended the budget surplus?
The recession in the 2000s, tax cuts, and increased govt spending
What is commodity money?
an item that is used as money, but which also has value from its use as something other than money
Transaction costs
Banks are a critical intermediary in what we call the payment system, which helps an economy exchange goods and services for money or other financial assets. Also, those with extra money that they would like to save can store their money in a bank rather than look for an individual who is willing to borrow it from them and then repay them at a later date. Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash. Transaction costs are the costs associated with finding a lender or a borrower for this money. Thus, banks lower transactions costs and act as financial intermediaries—they bring savers and borrowers together. Along with making transactions much safer and easier, banks also play a key role in creating money.
