Test 3 Flashcards
Inflation
The decline in the purchasing power of the dollar
or the increase in general prices
2 Most Reoccurring Economic Problems in America
- Inflation
2. Unemployment
3 Types of Inflation
- Demand Pull Inflation
- Cost Push Inflation
- Administrative Inflation
Demand Pull Inflation
Caused by consumers having too much money to spend given the availability of goods and services they can buy
Cost Push Inflation
Caused by an increase in the cost of some factor of production which is used in the production of various goods and services
Administrative Inflation
This occurs because prices were raised to provide for higher profits
Unemployment
When a person is both willing and able to work but has no job
3 Types of Unemployment
- Frictional Unemployment
- Cyclical Unemployment
- Structural Unemployment
Frictional Unemployment
A situation where a person or an employer decides that the person and the job no longer match and the person is fired or they quit
Cyclical Unemployment
A situation where there are literally fewer jobs than people desiring to have a job
Structural Unemployment
A situation or a persons job has been eliminated, usually because of technological advancements (computers take over)
Labor Force
Includes the total number of workers which includes both employed and unemployed
Who comes up with the unemployment rate?
Bureau of Labor Statistics
Unemployment Rate
The percent of the labor force that is unemployed
Monetary Policy
Refers to the availability of credit and the size of the money supply
Who controls Monetary Policy?
Federal Reserve System
What does Monetary Policy deal with?
Inflation
How does Monetary Policy deal with inflation?
Shrinking the money supply
Fiscal Policy
Refers to government spending and taxation
Who controls Fiscal Policy?
Congress and the President
What are the goals of Monetary Policy?
- Price Stability
- High Employment
- Economic Growth
- Stability of Financial Markets
- Interest Rate Stability
- Foreign Exchange Stability
Why is it difficult to determine the Unemployment Rate?
- There are people who aren’t really trying to get employed
- There are people who have tried to find a job and then gave up
- There are people who are working but are getting paid “under the table” (not paying taxes)
Federal Reserve System was created by what?
Federal Reserve Act of 1913
Federal Reserve System
Nations central banking system
What is the Federal Reserve System responsible for?
- Supervising the banking system
2. Implementing Monetary Policy
What is the Function of the Federal Reserve System?
- Clear Checks
- Serve as a lender of last resort (they can loan money to commercial banks)
- Provide coins and currency to commercial banks
- Primary means of marketing US securities
US Securities
US Saving bonds
Structure of the Federal Reserve System
- Board of Governors
- Open Market Committee
- Advisory Council
- Federal Reserve Banks
- Member (Commercial) Banks
How many are in the Board of Governors?
7
Who are the Board of Governors appointed by?
Appointed by the President and confirmed by the Senate
How long do the Board of Governors serve?
14 years
What is the function of the Board of Governors?
- Oversee the Federal Reserve Banks
- Set reserve requirements
- Approve the discount rates
How many are in the Open Market Committee?
12
How many are in the Advisory Council?
12
How many Federal Reserve districts are there in the US?
12, each with a Federal Reserve Bank and a member of the Advisory Council
What is the function of the Advisory Council
- Advise the Board of Governors on the economic conditions in their district
How many Federal Reserve Banks are there?
12, 1 per district
What is the function of the Federal Reserve Banks
- Propose discount rates
- Hold reserves for banks
- Lend money to banks
- Clear checks
- Serve as the bank for the US government
How do they become part of this system Member (Commercial) Banks
Must have:
- National Charter (Given by Office of the Comptroller of Currency)
- State Charter (Given by Commissioner of Financial Institutions)
- Member of FDIC (Federal Deposit Insurance Corporation)
What does the FDIC do?
Insures your bank deposits up to $250,000
Four Tools of Monetary Policy
- Alteration of the Discount Rate
- Alteration of Reserve Requirements
- Open Market Operations
- Moral Suasion
Alteration of the Discount Rate
The interest rate that commercial banks must pay when they borrow from the Federal Reserve System
Alteration of Reserve Requirements
The Federal Reserve System either raises or lowers them
When they are lowered banks will lend more money
When they are raised banks will lend less money
Open Market Operations
Buying and selling of government securities
Moral Suasion
A set of suggestions from the Federal Reserve System to member banks suggesting a course of action
Three Components of Money
- Coins
- Currency
- Demand Deposits (Checking Account Deposits)
Barter
Trading
Problems with Bartering
- Spoiling
- Transportation
- Double Coincidence of Wants
Coincidence of Wants
Finding someone who wants what you have and has what you want
Three Functions of Money
- Serves as a Medium of Exchange (easily accepted for exchange)
- Unit of Account
- Store of Value (Can be saved and spent later)
Unit of Account
Standard which makes one able to assign value to a good or service
What is the function of the Open Market Committee?
- Chief Policy making body for the Federal Reserve
2. Direct the buying and selling of government securities and foreign currencies
What gives the US money supply its value?
Nothing!
The peoples confidence in the government
3 Stages in Defining the Value of Currency in US?
Currency was/is defined by:
- Gold/Silver can exchange paper for gold
- Gold/Silver but no longer can exchange paper for gold
- Nothing, which is unstable
Reasons to Abandon the Gold Standard
- There is a limited quantity available
- There are other uses for gold and silver
3.
Freely Fluctuating Exchange Rate
In comparison to other countries all currency is free to go up and down
