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28 Cards in this Set

  • Front
  • Back
What are the three Major Monetary Tools?
(1)Federal Reserve Requirement (2) Discount Rate (3) Federal Open Market Operations
What the Federal Reserve Requirement?
As the Reserve Requirement goes down, the Money Supply goes up OR As the Reserve Requrement goes up the Money Supply Goes Down. (EX: 1/.2 x 10,000 = 50,000 vs, 1/.1 x 10,000 = 100,000)
What is the Discount Rate?
The Rate at which the Fed charges member banks for borrowing funds (abbreviated small cursive "r'). as the rate goes up, the money supply goes down, as the rate goes down the money supply goes up.
What is the Federal Open Market Operations?
The buying and selling of government securities on the open market. Buy Bonds the money supply goes up, sell bonds the money supply goes down. This happens every day
What are the two minor qualitative tools
(1) Moral Suasion (A persuasion tactic used by an authority to influence and pressure, but not force, banks into adhering to policy) and (2) Margin requirements on stock market transactions (% Bank can loan for Stock Market Transactions)
What are Automatic Fiscal Stabilizers?
Things placed within the system that act automatically.
Give (3) examples of Automatic Fiscal Stabilizers.
Farm-aid programs, Unemployment Compensation, Automatic Changes in tax receipts
What are Farm Aid Programs?
When income levels fall payments are automaticlly made under existing farm aid programs. These payments represent $ injections into the income stream which either have an expansionary or stabilizzing effect on the econemy. (EX. $3.50 to brake even on a busshel of wheat. Supply goes up, price goes down, govt. adds money to get back to $3.50)
What is Unemployment Compensation?
When the econemy is experiencing high levels of unemployment & lower GDP, unemployment compensation payments are made automatically thereby injecting $ income into the econemy which tends to stabilize/incresase the "C" (household) component of total spending.
What are automatic changes in tax receipts?
An increase in tax receipts is more than proportional to the increase in income. That is when income reises the relative % increase in taxes is greater than the relative % increase in income. This is due to our progressive graduated income tax rate structure.
What are discreshionary tools/weapons?
Tools or weapons that must be legislated (doesn't happen automatically).
Give (4) examples of Discreshionary tools.
(1) Varying public works & other expenditure programs (2) Varying welfare and other transfer expenditure programs (3) Amount and Duration of unemployment compensation (4) Change the entire tax rate structure.
Explain Varying public works & other expenditure programs.
Unemployment goes up, income goes down, and governemtn enacts public works programs
Explain Varying Welfare and other transfter expenditure programs
To expand exonemy a law can be passed that increases (1) veterans bonuses (2) parity payments for farmers (increase wages to make them equal to industrial wages to encourage them to farm)
What is Fiscal Drag?
The automatic growth in tax revenuses as income increases, resulting from a progressive income tax structure.
What is meant by the term monitary?
Influenced by the Federal Reserve
What is meant by the term Fiscal?
Influenced by the Federal Governement
How is money created?
With a 20% reserve requirement: Person a Deposits $10,000, the bank can loan $8000 and retains $2000. Person B Deposits the $8000 so the bank can loan $5400 and retains $1600 and so forth.
What is the money creation formula?
1/Reserve Requirement x Initial deposit
What (4) things are necessary to make money creation work?
(1) Banks must receive new reserves because they must have excess reserves to loan $ (2) Banks must be willing to loan $, (3) Someone must be willing to borrow money (4) Individuals and businessses must leave money on deposit rather than depleating the banks reserves by withdrawing funds.
What is the equasion of exchange or quantity theory of $?
MV=PQ; Money Supply x Rate at which money stoch exchanges hands in one year = price level X quantity of goods & services.
What are the two theories on why business cycles occur?
(1) External - Wars, Climatic Changes, Innovation, Invention (2) Internal - Over Investment/Under Consumption (housing in 70's & 80's in Alaska)... Business cycles do occur, however, because disturbances to the economy of one sort or another push the economy above or below full employment. Inflationary booms can be generated by surges in private or public spending. For example, if the government spends a lot to fight a war but does not raise taxes, the increased demand will cause not only an increase in the output of war matériel, but also an increase in the take-home pay of defense workers. The output of all the goods and services that these workers want to buy with their wages will also increase, and total production may surge above its normal, comfortable level.
What is the legal reserve requirement?
(1)Vault Cash - $ in the bank
(2)Balances in commercial bank accounts at the federal reserve.(A)To maintain people's confidence in the banking system.
(B) To ensure that money that people deposit in banks is protected from bankruptcy on the part of the bank.
(C) To ensure that cash is available when depositors demand it.
(D)To enable the banking authorities to control the amount of lending and the supple of money.
What are the effects of excess reserves on the relative success of monetary policy aimed to contract the money supply?
Excess reserves hinder the success of monetary policy.
What is Expansionary Fiscal Policy?
Expansionary Fiscal Policy: The recommended fiscal policy to correct the problems of a business-cycle contraction is expansionary fiscal policy. Expansionary fiscal policy includes any combination of an increase government purchases, a decrease in taxes, or an increase in transfer payments. This fiscal policy alternative is intended to stimulate the economy by increasing aggregate expenditures and aggregate demand. It is primarily aimed at reducing unemployment
What is Contractionary Fiscal Policy?
Contractionary Fiscal Policy: The recommended fiscal policy to correct the inflationary problems of a business-cycle expansion is contractionary fiscal policy. Contractionary fiscal policy includes any combination of a decrease government purchases, an increase in taxes, or a decrease in transfer payments. This fiscal policy alternative is intended to restrain the economy by decreasing aggregate expenditures and aggregate demand. It is primarily aimed at reducing inflation.
How does Unemployment Compensation work?
The Unemployment Insurance (UI) program acts as an automatic stabilizer. When employment grows, UI program revenue rises through increased tax revenues while UI program spending falls as fewer workers are unemployed. This creates a surplus of funds for the UI program to draw upon during a recession. In a recession, UI tax revenue falls and UI program spending rises as more workers lose their jobs and receive UI benefits. The increased amount of UI payments to unemployed workers puts additional funds into the economy.
Moral suasion
Moral suasion (a phrase from the Latin words “moral” and “suasio” which denote respectively “conduct or character that is right and virtuous”[1] and “to present in a pleasing manner”[2] - sometimes known as Jawboning[3]), is defined in the economic sphere as “the attempt to coerce private economic activity via governmental exhortation in directions not already defined or dictated by existing statute law.”[4] The 'moral' aspect comes from the pressure for 'moral responsibility' to operate in a way that is consistent with furthering the good of the economy[5].