ECONOMICS FINAL EXAM example #83524

assets that people are generally willing to accept in exchange for goods and services or for payment of debts.

Anything of value owned by a person or firm.

A good used as money that also has value independent of its use as money.

Money such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.

The central bank of the United States

The narrow definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.

A broader definition of the money supply: It includes M1 plus savings account deposits, small-denomination time deposits, balances in money market deposits accounts in banks and non institutional money market fund shares.

Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

Reserves that a bank is legally required to hold, based on its checking account deposits.

Reserves that banks hold over the legal reqquirement

A banking system in which banks keep less than 100 percent of deposits as reserves.

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy. FED

Federal Open Market Committee The Federal Reserve Committee responsible for open market operations and managing the money supply in the United States.

The buying and selling of Treasury securities by the Federal Reserve in order to control the money supply.

Loans the Federal Reserve makes to banks

The interest rate the Federal Reserve charges on discount loans

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives The actions taken to manage the money supply and interest rates to achieve macroeconomic policy goals.

The Federal Reserve's policy of increasing interest rates to reduce inflation

The Federal Reserve's policy of decreasing interest rates to increase real GDP

changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals "Legislative and Executive branch" when non discretionary

Government spending and taxes that automatically increase or decrease along with the business cycle Unemployment/ Insurance

A decline in private expenditures as a result of an increase in government purchases. when private expenditures fall as government spending increases (commanding greater share of resources)

The situation in which the government's expenditures are greater than its tax revenue Tax Revenue< Government spending This could cause Future tax liability and crowding out

The situation in which the government's expenditures are less than its tax revenue Tax revenue> Government spending

The problem is called a double coincidence of wants, where each person to a trade must want what the other person has.

Commodity money has value independent of its use as money, whereas fiat money, typically paper currency, does not have value independent of its use as money.

The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment. In the long run, something will not serve as money if it does not fulfill all four functions.

Businesses accept paper currency because they believe paper currency is acceptable to their customers and to other businesses. Paper currency serves as money because people believe that others will accept it from them.

M2 includes M1 plus savings account balances, small-denomination time deposits, money market deposit accounts in banks, and non institutional money market fund shares.

The three policy tools are open market operations, discount policy, and reserve requirements, with open market operations being the most important.

When the Federal Reserve buys Treasury securities from the public, the sellers of the securities deposit the funds in their banks, increasing bank reserves. When the Federal Reserve sells Treasury securities to the public, the buyers of the securities pay with checks, decreasing bank reserves.

When Congress established the Fed in 1913, the main responsibility of the Fed was to prevent bank panics by making discount loans to banks. Congress broadened the Fed's responsibilities in response to the Great Depression.

The Fed's four monetary policy goals are price stability, high employment, economic growth, and stability of financial markets and institutions.

the Federal Reserve has a dual mandate in the sense that the Employment Act of 1946 explicitly mentioned that it is the responsibility of the federal government (including the Federal Reserve) to promote maximum employment and stable prices.

A monetary policy target is a variable that the Fed can affect directly and that, in turn, affects variables that are closely related to the Fed's policy goals, such as low unemployment and low inflation. The Fed uses policy targets because it cannot affect its policy goals directly but must affect the goals indirectly through its policy targets.

If the Fed believes the economy is about to fall into recession, it should conduct expansionary monetary policy, increasing the money supply and reducing interest rates. If the Fed believes that the inflation rate is about to increase, it should conduct contractionary monetary policy, decreasing the money supply (or decreasing the growth of the money supply) so as to increase interest rates.

Fiscal policy refers to changes in federal government purchases and taxes that are intended to achieve macroeconomic policy objectives. The president and Congress are responsible for fiscal policy.

Fiscal policy involves changes in federal government purchases and taxes. Monetary policy involves changes in the money supply and interest rates. Both are intended to achieve macroeconomic policy objectives.

46.4%

"entitlements" -social security -unemployment benefits -medicare -medicaid -food stamps

Medicare is health insurance for 65 and over, while medicaid is health insurance for low income

social security balances out at 5 percent. Medicare/medicaid continuously increases by increments of 5

Automatic STabilizers and Discretionary

Changes in tax/spending policies by government

1. Price Stability 2. High employment 3. Stable Financial Markets (same as saving and investing) 4. Economic growth

1. Expansionary- Buy Bonds 2. Contractionary- Sell bonds (too much money in economy)

Open market operations

1. growth 2. unemployment 3. Inflation

100 % Reserve Banking ("money warehouse")

Fractional Reserve Banking "Loan Making"

1. Durable 2. Divisble 3. Standardization 4. Scarce (valued)

Monetary Policy