Test #2 Ch. 5,6 Flashcards
Socialize
To spread an individual’s cost or value to society, at large.
Karl Marx
The founder of socialism; “Production should come from each, according to his ability, to each, according to his need.”
Authoritarian Choice
The state’s decisions are made by a dictator, the peoples’ elected representatives, or by popular vote.
First Original Rationale for Socialism
Firms have more power than individuals, so they exploit workers.
Second Original Rationale for Socialism
Given that individuals have no control over which class they are born into, the class system is unfair, so society must be controlled to eliminate the class system; fairness.
External Costs
Costs that naturally spill over to others.
Externalities
External costs and external benefits.
US Socialism
The individual should act to promote the good of society, not the individual’s well-being; generally fascistic in nature.
Fascism
A system under which the state does not take title to property, but orders the use of that property and the individual in any way it wishes.
Eminent Domain
Where property is taken for state public use, such as roads, and parks, but the owner is compensated.
Civil Forfeiture
Where a person is suspected of a crime and that person’s property is seized because it is automatically suspected as having contributed to the crime.
The Latest Socialist Rationale
If the state provides any good from which the individual might derive external benefits (roads, schools, courts) no property is private and the state is justified in dictating that use of the individual’s property and income; popularized in the US.
“the pursuit of happiness”
The right to hold and use property freely, to choose one’s profession, to make contracts, and to travel.
Capitalist View
Society’s best interest is promoted by the individuals with property rights making voluntary decisions.
Incentive Problem of Socialism
Free markets give individuals incentives to voluntarily serve while socialism divorces consumption from production and, in that way, takes the incentive to voluntarily serve.
Money
Anything that is generally acceptable in making exchanges.
Barter
Trading without the use of widely accepted means of exchange.
Double Coincidence of Wants
This must exist to exchange with barter; The requirements of a barter exchange that each trader has want the other wants and wants what the other has.
Commodities that evolved into money
Labor, cattle, salt, cowry shells, cod, tobacco, sugar, iron, copper, gold, and silver.
Functions of Money
- Medium of Exchange
- Unit of Account
- Store of Value
Medium of Exchange
It is generally acceptable and convenient for exchange.
Unit of Account
Each unit of it is “worth” the same amount.
Store of Value
It retains value over time
Flat Money
Money that does not have any other use
Commodity Money
Money that might have other uses.
Liquidity
The ease with which an asset can be converted to spendable form.
M1
Most referenced measurement of our money supply; It is the sum of:
- paper currency held outside banks
- checking account balances
- Travlers’ checks
US Federal Reserve
Creates every US dollar that exists in the world; established in 1913 to stabilize the banking system through being a lender of last resort to troubled banks.
Board of Governors
- Seven governors appointed by the President with the advice and consent of the Senate, who serve 14 year terms.
- A chairman who is appointed by the President every 4 years, who must also face confirmation by the US Senate.
Monetary Policy
The process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
Federal Open Market Committee
- The Board of Governors
- The President of the New York Federal Reserve Bank
- The Presidents of the other 11 district banks, 4 of which vote at each meeting on a rotating basis.
3 Tools of Monetary Policy
- Open Market Operations
- The Required Reserve Ratio
- The Discount Rate
Open Market Operations
Buying and selling US government bonds from individuals and businesses who previously bought them from US government. When the Fed buys bonds, bonds flow into the Fed and money flows into the economy, increasing the money supply, and vice versa.
The Required Reserve Ratio
The Fed sets the required reserve ratio, which is the percentage of deposits that banks cannot lend out, but most hold as reserves.
- A bank’s reserves consist of its vault cash plus the bank’s account with the Fed
- Excess reserves are reserves that banks hold in excess of those the Fed requires
The Discount Rate
The interest rate that a bank pays when it borrows from the Fed as a last resort
Federal Fund Rate
A free market rate at which banks lend to other banks.
Value of the Dollar in the Domestic Economy
Depends on how many and which goods and services it will buy.
Consumer Price Index (CPI)
Each month the Bureau of Labor Statistics (BLS) measures the prices of 200 goods that a typical consumer buys. The measurement is a weighted average of the prices- weighted by the amounts of the goods that consumers purchase.
PCE Price Index (Personal Consumption Expenditures Index)
Measured by the Federal Reserve; excludes food and fuel, which makes up 20% of household purchases.
Nominal Income
The number on the paycheck.
