Section 101 Unit 8 Flashcards
Supply
Is the amount of a good or service available for purchase by suppliers at a given price.
Demands
Is the quantity of goods and services consumers want to purchase at a give price.
Substitution Effect
When the price of a good rises, consumers substitute other similar lower-priced goods for it.
Income Effect
When the price of a good rises, consumers will discontinue or significantly reduce their use of it, unless their incomes are also rising at a comparable pace.
Price Elasticity
Is the responsiveness of the quantity of a good demanded to changes in the good’s price, all other economic forces remaining constant.
Inelasticity
Not susceptible to price change. Still demanded regardless of price.
Equilibrium
The price of a good or service and how much will be produced is indicated at the intersection of the supply and demand curves.
Gross Domestic Product GDP
Is the total market value of all goods and services produced within the domestic United States over the course of a given year, including income generated domestically by a foreign firm. (based on geographic location)
Gross National Product GNP
Is the total market value of all goods and services produced by US residents’ labor and property. (based on ownership)
Monetary Policy
One of two methods to influence the level of future economic activity. Is conducted by the Federal Reserve Board and attempts to affect economic activity by raising and lowering short-term interest rates because they affect consumer spending, or demand.
Fiscal Policy
The second of the two methods to influence the level of future economic activity. It is conducted by congress and also attempts to influence consumer demand but does so through government policies.
Monetary Policy
Three Methods
- Lowering or increasing the amount of required reserves that must be held by banking members of the Federal Reserve System.
- Raising or lowering the Fed’s discount rate (the amount of interest that is charged by one of the 12 Federal Reserve Banks to other Banks)
- Engaging in open-market operations, which is the buying or selling of government securities in the open marketplace by the Federal Reserve Board.
Open Market Operations by the FED
BEST
An easy way to remember buying securities drive down the interest rates and increasing money supply or selling government securities to drive up the interest rates and decrease money supply is through BEST. Buy-Easy-Sell-Tight
Discount Rate
The FED only directly controls one interest rate, The Discount Rate. When the FED raises the discount rate, it increases the borrowing cost and discourages member banks from borrowing funds, resulting in a contraction of the money supply. Just the opposite if they lower the discount rate. Increase the money supply allowing for more lending.
Federal Fund Rate
Is the interest rate charged on short-term borrowing (often overnight to fulfill reserve requirements) between banks; the Fed targets this rate in all of its interest rate decisions but, again, does not directly control it.
Prime Rate
Is the rate of interest charged by commercial banks to its best business and personal customers. This rate is set directly by the commercial bank lending it’s money; however, it normally is about three percentage points higher than the federal fund rate. Thus being connected to the the Feds still.