Test #2 Ch. 5,6

Question 1

Socialize

Answer 1

To spread an individual’s cost or value to society, at large.

Question 2

Karl Marx

Answer 2

The founder of socialism; “Production should come from each, according to his ability, to each, according to his need.”

Question 3

Authoritarian Choice

Answer 3

The state’s decisions are made by a dictator, the peoples’ elected representatives, or by popular vote.

Question 4

First Original Rationale for Socialism

Answer 4

Firms have more power than individuals, so they exploit workers.

Question 5

Second Original Rationale for Socialism

Answer 5

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.

Question 6

External Costs

Answer 6

Costs that naturally spill over to others.

Question 7

Externalities

Answer 7

External costs and external benefits.

Question 8

US Socialism

Answer 8

The individual should act to promote the good of society, not the individual’s well-being; generally fascistic in nature.

Question 9

Fascism

Answer 9

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.

Question 10

Eminent Domain

Answer 10

Where property is taken for state public use, such as roads, and parks, but the owner is compensated.

Question 11

Civil Forfeiture

Answer 11

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.

Question 12

The Latest Socialist Rationale

Answer 12

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.

Question 13

“the pursuit of happiness”

Answer 13

The right to hold and use property freely, to choose one’s profession, to make contracts, and to travel.

Question 14

Capitalist View

Answer 14

Society’s best interest is promoted by the individuals with property rights making voluntary decisions.

Question 15

Incentive Problem of Socialism

Answer 15

Free markets give individuals incentives to voluntarily serve while socialism divorces consumption from production and, in that way, takes the incentive to voluntarily serve.

Question 16

Money

Answer 16

Anything that is generally acceptable in making exchanges.

Question 17

Barter

Answer 17

Trading without the use of widely accepted means of exchange.

Question 18

Double Coincidence of Wants

Answer 18

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.

Question 19

Commodities that evolved into money

Answer 19

Labor, cattle, salt, cowry shells, cod, tobacco, sugar, iron, copper, gold, and silver.

Question 20

Functions of Money

Answer 20

1. Medium of Exchange
2. Unit of Account
3. Store of Value

Question 21

Medium of Exchange

Answer 21

It is generally acceptable and convenient for exchange.

Question 22

Unit of Account

Answer 22

Each unit of it is “worth” the same amount.

Question 23

Store of Value

Answer 23

It retains value over time

Question 24

Flat Money

Answer 24

Money that does not have any other use

Question 25

Commodity Money

Answer 25

Money that might have other uses.

Question 26

Liquidity

Answer 26

The ease with which an asset can be converted to spendable form.

Question 27

M1

Answer 27

Most referenced measurement of our money supply; It is the sum of:

• paper currency held outside banks
• checking account balances
• Travlers’ checks

Question 28

US Federal Reserve

Answer 28

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.

Question 29

Board of Governors

Answer 29

• 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.

Question 30

Monetary Policy

Answer 30

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.

Question 31

Federal Open Market Committee

Answer 31

• 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.

Question 32

3 Tools of Monetary Policy

Answer 32

1. Open Market Operations
2. The Required Reserve Ratio
3. The Discount Rate

Question 33

Open Market Operations

Answer 33

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.

Question 34

The Required Reserve Ratio

Answer 34

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

Question 35

The Discount Rate

Answer 35

The interest rate that a bank pays when it borrows from the Fed as a last resort

Question 36

Federal Fund Rate

Answer 36

A free market rate at which banks lend to other banks.

Question 37

Value of the Dollar in the Domestic Economy

Answer 37

Depends on how many and which goods and services it will buy.

Question 38

Consumer Price Index (CPI)

Answer 38

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.

Question 39

PCE Price Index (Personal Consumption Expenditures Index)

Answer 39

Measured by the Federal Reserve; excludes food and fuel, which makes up 20% of household purchases.

Question 40

Nominal Income

Answer 40

The number on the paycheck.