quiz 3 Flashcards
budget surplus
tax collection > gov spending
- rare
- occur in 1968, 1999, 2000
budget deficit
tax collection < gov spending
- normal for US
budget balanced
tax collection = gov spending
What is US national debt
35.8 trillion
what was US national debt is 2000
5 trillion
- it was also decreasing cuz there was a surplus
what was US deficits
$2 trillion
treasury bill
gov must repay borrowed amount within 90 days
notes
gov can repay debt between 90 days - 10 yrs
bond
gov can repay between 10-30 yrs
progressive income tax
tax rate ↑ as income ↑
regressive income tax
tax rate ↓ as income ↑
- no country currently has regressive income tax
flat income tax (proportional)
tax rate is constant at all income level
- some country has it
author laffer
suggest its possible to ↑ tax collection by ↓ tax rate on same wage earner
- laffer is DYNAMIC cuz it accounts for change in behaviors
what is OECD
organization for economic cooperation and development
what happen during 1980-2001
during this time:
- only had 30 countries
- 29/30 lowered tax rate = ↑ tax collection
- US tax rate were lowered & tax collection ↑ & deficit ↑
Barter system of exchange
- goods traded for good
- good traded for a service
- service traded for service
problem w Barter
- non-uniform value
- ex: 1 big avocado for 1 lemons - difficult to trade high value items
- spoilage
- goods like agriculture lose values when it goes bad - double coincidence of wants
- every person has to find another person who has what they want and want what they have - time consuming
- seasonality
- difficulty in taxation
- no tax = no gov funding = no gov service - transportations
3 functions of money
- score of value
- medium of exchange
- way of quoting prices
6 desirable characteristics of goods
- uniform consistency
- limited
- durable
- easily transport
- easily divisible
- universally accepted (MOST IMPORTANT)
Money evolution
- commodity money
- fully backed
- partially backed
- fiat
commodity money
money that has value on its own, even if it’s not used as money
- ex: gold/copper/rice was the past currency
fully backed (bodied)
Value is placed in a receipt, where the value of receipts = value available in the vault
ex: customized receipt -> standardized receipt (the person w that receipts now is the owner of that asset)
partially backed
notes where value exceeds the amount in the vault
fiat
our current money paper money w no backing or convertibility
how does fiat money get its value
- trust/confident that other will accept it
- trust/confident that gov will not print too much, where money value
banks
can make inflationary/recessionary gap worse by ↑ interest rate (causing AD <- = bigger gap)
central bank
1913 Federal Reserve Act
federal reserve system
known as “FED:” who regulates banking
3 levels of banks
- board of governor (BOG)
- Federal Open Market Committee (FOMC)
- 12 regional banks
1st level of bank
BOG = looks at the big picture decision of MP
- consist of 7 ppl
- appointed by the president w advice n consent of the senate
- term: 14 yr 2 yr rotation
list of different terms
normal term - 14 yrs 2yrs rotation
voluntary separation - leave voluntarily
death
mental incapacity - person adjudicated by 3 panel position claiming you arent fit for the job
fraud
who is the most important person of BOG
there’s 1 person who acts as “the chair”
- makes decision + break ties
- 4 yrs term n can be renominated
FOMC
details of MP
- 12 ppl
(7 BOG + NYC FED president + 4 other regional bank presidents)
12 regional banks
atlanta
boston
chicago
cleveland
kansas
Minneapolis
philadephia
richman
st. louis
SF
dallas
NYC (most important)
(mostly in east coast)
what are 2 theme regarding the fed
- dispersion of power
- FED acts slowly n in tiny steps
6 functions of the FED
- conduct MP
- FED serves as bank for US gov
- regulates bank industry
- responsible for clearing checks
- serves as an agent of US treasury
- lender of last resorts
monetary policy
set of tools used to influence the economy
1st FED functions
conduct MP (adjust the supply of money)
- use 4 tools
1st tool
change in required reserve ratio (RRR)
- if FED wants expansionary MP, ↓ RRR
↓ RRR means bank has more to loan, which grows the eco
Required reserve ratio
% of deposit that bank must keep in cash or on file w the fed
- if % is not met, bank shut down
fractional reserve banking system
banks hold on a % of deposit
- Banks don’t keep all the money you deposit with them.
and lends them out to others
2nd toolsa
change in discount rate
- if FED want expansionary MP = ↓ discount rate
(this will let bank have more money to loan out, growing eco
discount rate
interest rate charged by the fed on loans it makes to the bank
- THE ONLY INTEREST RATE THAT THE FED CAN SET
federal fund rate
interest rate that is charged by banks on loans they lend to other banks
- ↑ ↓ rate depends on supply n demand
prime rate
Interest rate bank charge their best customers
3rd tool
change in interest paid to banks on their excess reserve deposited w the fed
- if fed want expansion MP = ↓ interest paid to bank on excess reserve
4th tools
open market operations
- if fed want expansion, fed BUYS US gov security
(when fed buys, the security goes to the fed but the bank will gain money
↑ monay = ↑ loan and ↓ interest rate
open market operations
fed buy/sell US gov security
- all banks own security bc
1. make them trustworthy (safe financial institute)
2. pay good interest
3. highly liquidity
2nd FED functions
fed serves as the bank for the US gov
3rd FED functions
FED regulates the bank industry
3 list of regulations that no longer exit
1. min contact hrs: fed tell banks to be open for a certain amount of time
2. hold time on deposit: money can’t be automatically spent
3. vault checks: ensure RRR is met
4th FED functions
fed is responsible for clearing check
5th FED functions
FED serves as an agent of the US treasury
- controls the circulation of money (when to release printed bills into eco)
6th FED functions
Fed is the lender of last resorts
- the idea that bank go to the FED last if they need a loan
- why?
1. other banks would have lower IR than the fed
2. reluctant for scrutiny from FED (bank borrowing money from FED kinds of set off a suspicious alarm)
1st Influence on supply
(market for loanable funds)
△ in wealth/income
- ↑ wealth/income ↑ supply
2nd Influence on supply
(market for loanable funds)
△ in time preferences
- ↓ time preferences ↑ supply
(time pref makes ppl save more so more to loan out)
time preferences
ppl tends to prefer to spend money sooner rather than later
3rd Influence on supply
(market for loanable funds)
demographic △ (more specifically age)
- if there are more ppl in prime earning yrs, ↑ supply
demographic earnings stages
- early: spending more than income
- also known as borrowing - prime earning
- tends to save - late: dis-saving where they spend less
1st influence on demands
(market for loanable funds)
investor conflict
- if business management few more confidence about the future, ↑ D
2nd influence on demands
(market for loanable funds)
productivity of capital
- if capital productivity ↑ D ↑
3rd influence on demands
(market for loanable funds)
gov borrowing (all levels)
- if gov borrowing ↑ D ↑
M1
liquid money that easily spent/converted
part of M!
- cash/coins
+ - outside of banks
- amount in bank’s checking account
- amount in NON-bank checking account
- ex: statefarm - amount in travelers checks
US M1
19 trillions
M2
broader measure of money that consist of M1 and other less liquid asset
part of M2
fiscal policy to fix recessionary
↑ gov spending
↓ tax
↑ transfr
monetary policy to fix recessionary
↓ RRR
↓ discount rate
↓
