some letters Flashcards
What three functions does money serve?
medium of exchange, unit of account/standard of value, store of value/wealth
What does an economist mean when he/she talks about M1, M2, and M3?
M1- currency and coins, checkable deposits.
M2- M1 plus savings accounts, small time deposits, money market mutual funds.
M3- M2 plus large time deposits.
What is the transactional demand for money?
money is used as a medium of exchange, not affected by interest rates
What is the asset demand for money?
money as a store of value, varies with the interest rate
How are transactional and asset demand related to changes in the interest rates?
transactional is not affected by interest rates
How do the money (financial) markets determine an equilibrium interest rate?
where transactional demand and asset demand meet
What are financial intermediaries?
firms that take funds received from depositors and lends the funds to third parties
What are some examples of financial intermediaries?
banks, savings and loan associations, credit unions, mutual savings banks
What are the three main purposes of a central bank?
issue a common currency, depository of federal government funds, control bank lending and the money supply
What was the 1913 Glas-Owen Bill?
established the 12 federal bank districts with the 7-member board of governors
What is the Federal Reserve System (FED), and why is it important to monetary policy?
our solution to our lack of a central bank, compromise between state and national govt
What are the major parts of the FED?
board of governors, federal open market committee, 12 federal reserve banks, commercial banks, thrift institutions
Where is the Federal Reserve Bank that serves Ohio located?
Cleveland
What is the difference between federal chartered bank and a state chartered bank?
state chartered banks are authorized to operate by state governments
What agencies regulate nationally chartered banks?
federal government, FDIC
What are the functions of the FED?
regulate money supply, supervise commercial banks, issue currency, act as a banker’s bank, provide for check collection
What is a bank’s balance sheet?
A = L + OE
What are the major assets of an average bank?
loans and securities
What are the major liabilities of an average bank?
savings and time deposits, demand deposits
What is a fractional reserve system?
financial intermediaries maintain reserves equal to only a portion of their deposits
What is a primary deposit?
represents new reserves brought into the banking system
What do we mean when we say that a bank “creates” money?
by making loans
What are reserve requirements, required reserves, and excess reserves?
reserve requirements- percent of primary deposits banks must keep on reserve.
excess reserves- dollar amount of reserves that are kept above the required resources
Where do banks keep their required reserves?
with the FED or as vault cash
What is the monetary multiplier, and how does it affect the money-creation process?
1 over the required reserve ratio
What is the role of interest rates in monetary policy?
either stimulate or to slow down economic activity
What is the difference between the discount rate, the federal funds rate, and the prime interest rate?
discount rate- rate that federal reserve charges banks for borrowing money to meet their cash reserve requirement.
fed funds rate- rate that banks charge other banks when they borrow funds to meet their cash reserve requirement.
prime interest rate- rate that a bank charges its most credit worthy customers.
What are the three major tools of monetary policy and how do they affect the money supply?
reserve ratio requirement, discount rate, federal open market operations
How would each of these tools be used during a recession?
decrease reserve requirements
decrease discount rate
buy govt securities from the public
How would each of these tools be used during an expansionary period?
increase reserve requirements
increase discount rate
sell govt securities to the public
Which monetary tool is used most often and why?
federal open market operations, no idea why
What are the major advantages of using monetary policy rather than fiscal policy?
speedier and more flexible than fiscal policy
isolation from political pressure
may be more effective than fiscal policy
What are the shortcomings of monetary policy over fiscal policy?
does not stop cost-push inflation
change in interest rates may not affect investment spending
cannot control both money supply and interest rates at the same time
Who was Milton Friedman, and what is the main belief of monetarist?
economist, believed that the government is the reason markets dont always work
What is the “monetary rule” offered by monetarist?
constant growth of the money supply
What relationship does the Phillips curve hold between inflation and unemployment?
there is a trade-off between the rate of inflation and the rate of unemployment
What is stagflation, and how does it contradict the Phillips curve?
combination of high interest rates and high unemployment, no trade-off as both were high
What were the possible solutions to the stagflation of the 1970s?
traditional Keynesian Fiscal Policy and/or Monetary Policy
wage and price guidelines
wage and price controls
tax-based income policy
What were the major economic “shocks” that occurred in the United States in the 1970s that caused stagflation to occur?
increase in energy prices
increase in food prices
increased price of imports
increase in wages
What events in the early 1980s helped to reduce stagflation?
severe recession reduced
FED increased interest rates
increase in foreign competition kept a lid on wage and price increases
decrease in OPEC’s power reduced energy costs
What were the major goals of supply-side economics (Reaganomics) offered by President Reagan?
decrease govt growth, govt regulation, negative work incentives, and tax rates
What is the Laffer curve, and what did it suggest about the tax rates during the 1980s?
shows relationship between tax rate and tax revenue
What were the major problems of Reaganomics that occurred when it was used in the 1980s?
tax cuts were too large and actually reduced govt revenue
increase in military spending, but without cuts in welfare programs, increased govt spending
What are the three major philosophies on the federal budget and how do they differ?
cyclically balanced budget- federal budget balanced over business cycle
functional finance- prioritized govt goals
annually balanced budget- fed budget balanced each fiscal year
Why is a cyclically balanced budget considered to be counter-cyclical?
if GDP is down, govt spending goes up
What was the Humphrey-Hawkins Bill of 1978, and how does it relate to the functional finance philosophy of the federal budget?
prioritized govt goals: keep unemployment low, kept inflation low, and if possible balanced the budget
What was the Gramm-Rudman Act?
congressionial act required an annually balanced budget to be achieved within five years
What reasons do some people give to push for an annually balanced budget?
debt is a burden
will not be able to make the payments or debt will be too large to repay
deficit is a result of big govt, need to scale back
large fed debt inrceases interest rates
Why is an annually balanced budget considered to be pro-cyclical?
in a recession, govt spending is forced down by the decrease in govt tax revenue - further decrease in economic activity and GDP
What did Adam Smith see as being important for economic growth to occur?
specialization of labor
maintaining patterns of growth
increasing capital deepening
What have been the main sources of growth for the United States in recent years?
technology advancement
increase in quantity of capital
education and training
Why was there a slowdown in U.S. growth from 1973 to 1995?
decrease in capital investment as a percent of GDP
decrease in the rate of capital deepening
decrease in labor quality due to influx of baby boomers
lack of technological progress
poor relationship between workers and management
What are some of the modern day problems of economic growth?
strain on the environment
unequal income distribution
a need to realize limits on growth
can cause human obsolescence and job insecurity
What is the difference between conservative economists and liberal economists?
conservative- preference for market-based solutions, against govt interference, sees economic problems as a result of the govt
liberals- market-based solutions are ok but imperfect, need to be modified not replaced, and sees govt actions as strengthening market solutions
