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91 Cards in this Set
- Front
- Back
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5 typical functions of a central bank
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1. lender of last resort
2. clearinghouse 3. fiscal agent for the federal government 4. exercise monetary policy (impact monetary supply) 5. serves as a bankers' bank (not individuals or private sector firms) |
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membership requirements for a commercial bank to join the federal reserve system
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-purchase stock in Fed district bank
-deposit cash reserves with district bank -National banks must join -State banks have option to join |
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Five types of money following the Civil War
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-SB notes
-NB notes -greenbacks -demand deposits -coins |
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In 1860-1865, wartime inflation meant: (3 things)
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-U.S. prices > international prices
-gold flowed out of the U.S. -payment of specie (gold) suspended |
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In 1860-1865, both Democrats and Republicans agreed that (increasing/decreasing) the price level was desirable
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decreasing
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In the 1860-1865 wartime inflation, farmers tended to align themselves with the (democrats/republicans) and lenders, bond-holders, and financial institutions tended to align themselves with the (democrats/republicans)
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democrats; republicans
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Severe Contraction
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Republicans - A significant cut in the money supply which would result in a significant cut in the price level. They wanted to literally burn the greenbacks
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Moderate Contraction
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Democrats - They anticipated an increase in Y, making P go down slowly. So they wanted to hold M fairly stable so that P will fall gradually as the economy grows
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1865 Contraction Act
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-reflects more of the Republican view
-M down led to P down -Congress abolished it in 1868 (the effects were too severe on debtors) |
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Monetary policy in 1868-1874 (after Contraction Act abolished)
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-more moderate policy (more of a Democratic view)
-M fairly stable and P down as Y goes up |
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In 1879-1900 the U.S. had a _ gold standard
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de facto
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Coinage Act of 1873
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treasury no longer buying or minting silver coins
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The Crime of 1873
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Treasury wasn't buying or minting silver because of the Coinage Act of 1873, so silver producers joined with reflationists against the act. (U.S. is supposed to have a bimetallic standard). They wanted coinage of silver at the old mint ration of 16:1. They called the Coinage Act the "Crime of 1873"
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"Sound Money Advocates" v. "Free Silver Movement"
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Sound Money Advocates - generally Republicans; Northeast; urban
Free Silver Movement - generally Democrats; West and South; rural |
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Bland-Allison Act of 1878
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limited coinage of silver
treasury to purchase 2-4 million dollars of silver per month at market price |
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Sherman Silver Purchase Act of 1890
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Treasury's monthly purchase increased to 4.5 mil at market price
Sellers received special treasury notes, redeemable in gold or silver at the discretion of the Treasury Preserved de facto gold standard, but treasury tended to redeem silver notes in gold Treasury gold reserves declined |
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1893: Sherman Silver Purchase Act repealed
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President Grover Cleveland signed; was a "sound money" Decocrat
Cleveland wasn't reelected because of him going to sound money movement against his own party - the democrats. 1893 bank panic/ recession |
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1896 election
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Bryan (Democrat/Populist) - free silver
v. McKinley (Republican) - sound money ISSUE: what type of monetary policy should the U.S. have? |
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After 1896, _ flowed into the U.S.
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Gold.
Favorable international trade situation: exports increased, imports decreased, leading to a trade surplus. New discoveries in gold. Supply increased from Ca, S. Africa, and Alaska support for silver declined |
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Gold Standard Act
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in 1900, legal adoption of gold standard.
one dollar = 25.8 grains of 90% pure gold at this point, most paper money issued by Fed were redeemable in gold |
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Discount Rate
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interest rate that the Federal Reserve charges commercial banks for federal loans
typically extremely short term serves as a lender of last resort |
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expansionary monetary policy
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When the Fed decides to lower the discount rate. Banks will loan more and interest rates will lower, leading to more people taking out loans. This will increase Money supply, leading to an increase in C(consumer spending). I(investment spending) increase, leading to an increase in Aggregate Demand
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contractionary monetary policy
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When the Fed decides to lower the discount rate. Banks will feel more conservative about holding reserves. The banks will make fewer loans, and at higher interest rates, leading the money supply(M) to decrease, consumer spending and investment spending will also go down, leading to a decrease in AD
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Reserve Requirement
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the percentage of bank liabilities (deposits) that commercial banks must hold as reserves
The Fed rarely changes the reserve requirement. It just serves to keep the system stable and retain confidence in the system |
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Increase in the reserve requirement
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(contractionary monetary policy)
Banks will reduce their loan portfolios, leading to fewer loans and higher interest rates. M↓ -> C↓ and I↓ -> AD ↓ |
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decrease the reserve requirement
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(expansionary monetary policy)
banks will now have excess reserves, so they will give out more loans, and the interest rates will go down, and M↑ -> C↑ and I↑ -> AD↑ |
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Open Market Operations
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the Fed. buys or sells treasury bonds in the open market with the intent of exercising monetary policy.
Most used policy today, however not in the 1920's and 1930's, when the discount rate was used most |
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When the Fed buys bonds (open market operations) ...
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(expansionary monetary policy)
The Fed buys the bonds from 20 or so primary banks. The banks consider that cash as an excess reserve, so they lend out the excess money, making M↑ -> C↑ and I↑ -> AD↑ |
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When the Fed sells bonds (open market operations) ...
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(contractionary monetary policy)
The banks have less cash, so their reserves are less, so they lend less money, making interest rates increase. This makes M↓ -> C↓ and I↓ -> AD↓ |
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Fed Funds Rate
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the interest rate at which banks themselves lend to eachother in terms of “overnight” loans
The Fed can impact this rate but they CANNOT set the rate |
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Four reasons why the economy was doing well in 1919, when WWI ended
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1. Continued deficit spending by federal government. (The government would spend more than it would make in terms of taxes)
2. High European demand for U.S. exports. 3. Expansion of M by Federal Reserve. The Fed decreased the discount rate. 4. High post-war domestic demand for consumer goods |
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Three economic changes in 1920
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1. European recovery led to a decrease in demand for US exports.
2. Federal government ceases deficit spending 3. Fed Reserve sharply reduces M by increasing the discount rate |
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fiscal policy
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comes from the legislative branch, and in some cases from the executive branch; changes in G and taxes that can impact output (and
prices). |
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Urban migration reflects the continued growth of
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manufacturing
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by 1920, _% of Americans are urban dwellers
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50%
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The growth of "consumer culture" in the 1920s involved these factors
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growing network of electrical power supply
widespread ownership of automobiles (Model T, Assembly line, etc), which led to the increase in construction of roads increase in consumer credit & installment plans more advertising increased demand for leisure activities |
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Top two fuel sources in the 1920's
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#1 is coal and #2 is electricity. Electricity is rising, because its cheaper and more efficient. 1/3 of power is electricity
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Who said “After all, the chief business of the American people is business. They are profoundly concerned with buying, selling, investing and
prospering in the world.” (January, 1925) ? |
Calvin Coolidge
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"yellow dog" contract
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as a condition of employment, a worker must sign a contract saying they will not join a union.
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1920's had a high demand for labor, especially in the _ industry
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consumer durables
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derived demand
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demand for labor depends on the demand for the product
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1920's had low/high unemployment?
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low 3.3% on average 1923-1929. Cyclical unemployment was around 0%
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Two reasons for immigration laws in 1921 and 1924
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racism and fear of post-war migration from europe
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Usual patterns for union membership, compared to union membership in the 1920's
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Usually, as real output increases, union membership increases, but in the 1920's union membership decreased
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4 Reasons for decline in union membership in the 1920s
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1. Anti-Union courts
2. Strong employer resistance 3. Poor union leadership 4. Worker contentment |
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Fiscal policy in the 1920's
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Tax cuts in 1924, 1926, and 1928. For personal income tax, the levels decreased, so there was more incentive to earn that extra dollar.
Government spending was decreased Budget surplus |
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Fed's position on the rising number of bank failures
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Commercial banks were being too risky, so when they fail, only the stronger banks will survive, letting the bank system as a whole become stronger.
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In the 1920's, farmers made up _%of the work force
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27%
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difference between income and wealth
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income is a flow measure. wealth is a stock measure
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(T/F) According to Rockoff (1990), during the 1896 campaign both McKinley and the Republicans argued that the only acceptable U.S. monetary standard was the gold standard.
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False
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In the National Income and Product Accounts (NIPA), investment spending is defined to include all of the followng EXCEPT:
A. spending by businesses on new computers. B. spending by businesses on new tools and machinery. C. spending by households on newly-constructed homes. D. spending by households on stocks and bonds. |
D. spending by households on stocks and bonds.
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If exports increase, aggregate expenditures will
A. increase. B. decrease. C. not change. D. sometimes increase and sometimes decrease. |
A. increase.
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If the Federal Reserve increases the discount rate, _____ will increase.
A. the money supply B. consumption spending C. interest rates D. aggregate demand E. All of the above. |
C. interest rates
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If the Federal Reserve decreases the reserve requirement, ______ will increase.
A. the supply of loanable funds B. the money supply C. investment spending D. aggregate demand E. All of the above. |
E. All of the above.
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The Federal Reserve almost never uses _____ to exercise monetary policy.
A. the discount rate B. the reserve requirement C. open market operations D. All of the above. |
B. the reserve requirement
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According to your text, following the passage of the 18th Amendment in 1920, ______ in the U.S.
A. crime decreased B. homocide rates decreased C. deaths from alcohol poisoning decreased D. consumption of alcohol decreased |
D. consumption of alcohol decreased
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During the Civil War, US exports _____ and US imports _____.
\ A. increased; increased B. decreased; decreased C. increased; decreased D. decreased; increased |
D. decreased; increased
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Which of the following statements provides accurate information about SILVER between 1874 and 1877?
A. The supply of silver increased. B. The market price of silver fell. C. Silver was over-valued at the mint ratio. D. The Treasury was not minting silver coins. E. All of the above. |
E. All of the above.
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Supporters of the "Free Silver Movement" generally included all of the following EXCEPT:
A. Democrats. B. farmers. C. silver producers. D. commercial banks. |
D. commercial banks.
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In the decade that followed the passage of the Bland-Allison Act, the supply of silver bullion _____ and the demand for silver bullion _____.
A. increased; decreased B. decreased; increased C. increased; increased D. decreased; decreased |
C. increased; increased
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Grover Cleveland _______.
A. was a member of the Populist party. B. repealed the Sherman Silver Purchase Act. C. was a "Free Silver" Democrat. D. was elected President in 1896. E. All of the above. |
B. repealed the Sherman Silver Purchase Act.
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(T/F)
A decrease in the tax rate will always cause a decrease in tax revenue |
F
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(T/F) The demand for farm products is price elastic while the supply of farm products is price inelastic
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F
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(T/F) The price elasticity of supply for farmers is positive and more than 1
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T
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(T/F) In the 1920’s supply of consumer durables grew more rapidly than the supply did
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F
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(T/F) Between 1923 and 1929 most of the unemployment was structural or frictional
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T
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(T/F) The fed funds rate is directly set by the fed
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F
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(T/F) Based on the Wizard of OZ article increasing the money supply would have been a proper countercyclical policy
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T
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(T/F) In the early 20’s farmers were facing adverse terms of trade which means the prices of farm products are falling more rapidly than overall prices
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T
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(T/F) Leisure has a positive income elasticity
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T
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(T/F) The Bland-Allison and Sherman Silver Purchase Acts allowed the treasury to make limited purchases of silver at the market price
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T
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(T/F) Northern US lead the way in developing high schools
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F
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(T/F) In 1920 the majority of Americans lived in or near a city.
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T
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(T/F) All else equal an increase in aggregate demand will cause unemployment to increase
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F
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(T/F) If the fed sells bonds on the open market it will decrease aggregate demand
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T
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(T/F) Many people were able to pay off their balloon payment rather than refinancing
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F
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(T/F) Replacing older factories with new more technologically advanced factories increases the marginal product of labor
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T
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Which of the following is one of the main reasons for rural banks failing in the 1920’s
a. The kept too many reserves b. They opened too many branches in outside states c. They had trouble diversifying their loan portfolio d. Poor internal management |
C
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Decreasing the money supply causes all of the following EXCEPT
a. Interest rates decrease b. Aggregate demand decreases c. Consumption spending decreases d. Investment spending decreases e. All of the above occur when money supply decreases |
A
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Which of the following was a contributing factor to the recession in the early 20’s?
a. Increased discount rate b. Decreased exports c. Decreased government spending d. B and c e. All of the above |
E
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All else equal an increase in the discount rate will cause which of the following
a. Banks to hold less reserves b. Money supply to increase c. Increase in interest rates d. Decreased consumption spending e. C and D |
E
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Excluding 1920 and 1921 the 1920’s can be described as experiencing
a. Deflation b. Inflation c. Stable prices d. Rapid growth e. B and D |
C
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The mid to late 1920’s was a time when wages were _________ and hours worked were
________ a. Increasing, decreasing b. Decreasing, decreasing c. Increasing, increasing d. Decreasing, increasing |
A
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Which of the following could be used to describe Henry Ford’s business (especially after the
assembly line) a. Price of his cars was increasing b. He paid workers a relatively higher wage c. Cost of making each car was decreasing d. A and B e. All of the above |
B
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All of the following is true of the emerging middle class EXCEPT
a. Used installment plans to purchase consumer durables b. Increased aggregate consumption by purchasing new homes c. Helped develop the suburbs d. All of the above are true of the middle class |
B
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Which of the following describes the consumer durables market in the 20’s
a. Supply increased, but demand increased faster b. Supply increased faster than demand increased c. Supply increased, but demand decreased d. Supply decreased, but demand increased |
B
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Based on the Wizard of Oz article farmers problems would not have been fixed through
monetary policy because a. Changing the money supply would not affect real price levels b. Deflation would cause farmers to pay more in taxes c. The market forces were the real culprit for the worsening terms of trade d. All of the above |
C
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Based on the Wizard of OZ article “high powered money” included
a. Gold b. National Bank Notes c. Government notes back by gold d. All of the above |
D
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Which of the following was NOT a provision of the McNary-Haugen Bill
a. Higher tariffs on imported agricultural products b. The program would be funded through taxes on corporate stocks c. Purchase of excess crops to increase the price d. Organized sale of excess crops on the world market |
B
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All of the following helped push the “consumer culture” except
a. Increased advertising b. More roads from the government c. Use of installment plans d. Better and more reliable electricity e. All of the above did help the “consumer culture” |
E
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The main monetary policy of the fed today is ________ in the 1920s they used the ____________
a. Discount rate, open market operations b. Open market operations, discount rate c. Reserve requirement ratio, open market operations d. Open market operations, reserve requirement ratio |
B
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