Macro-Economics: Ch. 11-13 Test

Card Set Information

Macro-Economics: Ch. 11-13 Test
2015-11-11 21:44:50
Macro Economics 11 13

Cards to study for Macro-Economics test.
Show Answers:

  1. When the Economy is in trouble two bodies fix it. Who are they?
    The Govt. and The Fed (Central Bank)
  2. What does the Govt. use to fix the economy?
    Fiscal Policy
  3. What does the Fed (Central Bank) use to fix the economy?
    Monetary Policy
  4. What does Fiscal Policy consist of?
    Automatic stabilizers and discretionary fiscal policy
  5. What is Discertionary Fiscal Policy?
    • The deliberate manipulation of the Fiscal Policy tools to promote macroeconomic goals.
    • Ex: Govt. Exp. and Taxes
  6. What is an Automatic Stabilizer?
    • Features of govt. spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle that are automatically in the system.
    • Ex: Transfer Payments
  7. What are Fiscal Policy's "tools" to fix the economy?
    Taxes, transfer payments, and govt. expenditures
  8. What is a transfer payment?
    • The govt. pays me to not do any work.
    • Ex: Unemployment Checks
  9. What does Fiscal Policy consist of?
    Expansionary and Contractionary Policy
  10. What does Expansionary Policy do? And how?
    Fixes a Contractionary Gap. Fixes it by lowering taxes, increasing transfer payments, and increasing govt. expenditures. This will reduce the unemployment rate, increase Aggregate Demand, disposable income, and buying power.
  11. What does Contractionary Policy do? And how?
    Fixes a Expansionary Gap (Over-full employment). Fixes it by increasing taxes, decrease transfer payments, and decreasing govt. exp.
  12. What is a Contractionary Gap?
    A contractionary gap occurs when the economy produces less than its potential.
  13. What does the School of Thought of Econmics consist of?
    Classical Economics and Keynesian Economics
  14. What did the Classical Economics believe? Why?
    The Classical Economics believed there should be no government intervention when the economy produces a problem (Laissez-Faire). The reason is because they believe the economy would fix itself through natural market forces.
  15. What did the Keynesian Economics believe? Why?
    The Keynesian Economics believed that the government should intervene when the economy produces a problem. The reason why is because John Maynard Keynes (the godfather of Keynesian Economics) found that prices and wages were inflexible and business expectations would be so grim that not even low interest rates would spur firms to invest all that consumers save.
  16. What is GDP?
    GDP is the natural rate of unemployment (5% unemployment)
  17. "The time required to approve and implement may hamper its effectiveness." Why?
    Because business cycles could last either for months, years, days, etc.
  18. What is an Annually Balanced Budget? What are the problems?
    • Annually you have to balance the budget at the end of the fiscal year. "Very good, sound theory"
    • Aimed at matching annual revenues with outlays, except during times of war.
    • Problem: None
  19. What is a Cyclically Balanced Budget? What are the problems?
    • The govt. has to the budget in one business cycle. "Better Practice"
    • A budget philosophy calling for budget deficits during recessions to be financed by budget surpluses during expansions.
    • Problem: One business cycle could be longer or shorter than the fiscal year
  20. What is Functional Finance? What are the problems?
    • The govt. should not balance the budget where time is the criteria. "Sounds good but..."
    • A budget philosophy using fiscal policy to achieve the economy's potential GDP, rather than balancing budgets either annually or over the business cycle.
    • Problem: power without responsibility/ accountability
  21. What is Crowding Out?
    • Govt. Exp. crowds out private investment (decrease in private investment).
    • The displacement of interest-sensitive private investment that occurs when higher government deficits drive up market interest rates.
    • Well: PI (high), Govt. Exp. (low)
    • Not Well: PI (low), Govt. Exp. (high)
  22. What is the concept behind Crowding Out?
    • Govt. Exp. should complement PI but...
    • Problem: Loan-able Loans
    • ->As govt. keeps loaning out money leaves less money for PI (Interest Rates increases)
    • ->As govt. does not loan out money leaves more money for PI (Interest Rates decreases)
    • Conclusion: Govt. Exp. and PI compete
  23. What are Loan-able Loans?
    The total amount of money to be loan out in the banking system.
  24. What is Barter? What were the problems?
    • Trade of goods for goods or services.
    • Problem: very restrictive (Double Coincidence of Wants)
  25. What is Double Coincidence of Wants?
    When two traders are willing to exchange their products directly.
  26. What is Money?
    • Money is what money does and anything that has medium of exchange, store of value, and unit of account.
    • Anything that is generally accepted in exchange for goods and services.
    • Money is anything that is durable, portable, divisible, has uniform quality, low opportunity cost, and stable value.
  27. What is Medium of Exchange?
    • Payment for goods and services.
    • Anything that facilitates trade by being generally accepted by all parties in payment for goods or services.
  28. What is Store of Value?
    Anything that retains its purchasing power over time.
  29. What is Unit of Account?
    • A standard on which prices are based.
    • A common unit for measuring the value of each good or service.
  30. How many types of Money is present today? What are they? How can you tell the difference between them?
    There are two types of money today. The two are Fiat Money and Commodity Money. The way to tell the difference between Fiat Money and Commodity Money is by observing their Intrinsic Value and Face Value.
  31. What is Fiat Money?
    • Paper notes
    • Money not redeemable for any commodity; its status as money is conferred initially by government decree but eventually by common experience.

    Ex: $1 Bill, $5 Bill, etc.
  32. What is Commodity Money?
    • Coins
    • Anything that serves both as money and as a commodity; money that has intrinsic value such as gold or silver coins
    • Ex: 1 cent coin, 5 cent coin, etc.
  33. What is Intrinsic Value?
    Intrinsic value is value determined by what is inside the money (physically)
  34. What is Face Value?
    Face Value is value stamped on money.
  35. Explain what each of the properties of Money means. (Durable, portable, divisible, uniform quality, low opportunity cost, and stable value).
    • Durable: money should not wear out quickly
    • Portable: money should be easy to carry, even relatively large sums
    • Divisible: market exchange is easier if denominations support a range of possible prices
    • Uniform Quality: if money is not of uniform quality, people will hoard the best and spend the rest, reducing the quality of in circulation
    • Low Opportunity Cost: the fewer resources tied up in creating money, the more available for other uses
    • Stable Value: people are more willing to accept and hold money if they believe it will keep its value over time
  36. What is Token Money?
    Money whose face value exceeds its cost of production.
  37. What is a Check?
    A written order instructing the bank to pay someone form an amount deposited
  38. Who were the Gold Smiths? How did they make money?
    • People who could take care of other people's valuables.
    • One way they earned money was by lending the 90% of the loan and holding onto the 10% leftover for transactions in order to earn interest (Fractional Reserve Ratio System). Another way they earned money was by taking care of other people's valuables.
  39. What is the Fractional Reserve Ratio System?
    When the bank loans out 90% of a person's deposit and keeps 10% to conduct regular bank transactions.
  40. What are Bank Notes?
    Banks were originally pieces of paper promising a specific amount of gold or silver to anyone who presented them to issuing banks for redemption; today, Federal Reserve notes are mere paper money.
  41. Compared to Early Banking with the Gold Smiths and Today's Banking with the Federal Reserve, what has changed in the last 400 years?
    Banking has not changed in the last 400 years.
  42. What were the problems of Early Banking?
    One of the problems of Early Banking was that the Gold Smiths were not able to give clients their money back. The other problem was the Gold Smiths got greedy and loaned out as much as they could.
  43. What is a Legal Tender?
    U.S. currency that constitutes a valid and legal offer of payment of debt.
  44. Pertaining to the Value of Money, if Prices increases what happens to the Value of Money? Vice Versa?
    • If prices increase, the value of money decreases.
    • If prices decrease, the value of money increases.
  45. What are Financial Intermediaries?
    Institutions such as banks, mortgage companies, and finance companies, that serve as go-betweens, borrowing from people who have saved to make loans to others.
  46. What are Depository Institutions?
    Commercial Banks and Thrift Institutions; financial institutions that accept deposits from the public.
  47. What are Commercial Banks?
    • Depository Institutions that historically made short-term loans, primarily to businesses.
    • They are big and have higher interest than thrift institutions.
    • Insured by the FDIC (Federal Deposit Insurance Corporation)
    • Do not have to be a member to use
  48. What are Thrift Institutions?
    • Savings banks and credit unions; depository institutions that historically lent money to households.
    • Small and has lower interest than Commercial Banks
    • Insured by the FDIC (Federal Deposit Insurance Corporation)
    • Have to be a member in order to use
  49. Who is the Federal Reserve? What do they do? Who do they deal with? Who do they consist of?
    • The central bank and monetary authority of the United States
    • States the basic rules for banks and determines reserve ratio
    • Deals with only Commercial Banks
    • Consist of 12 Banks/ Bank Regions in America
  50. What are Reserves?
    Funds that banks use to satisfy the cash demands of their customers and the reserve requirements of the Fed; reserves consist of cash held by banks plus deposits at the Fed.
  51. Who is above the Federal Reserve Banks? How many members are there? Who appoints and confirms them this position? How long are their terms?
    • The Board of Governors
    • 7
    • The President of the USA appoints and the Senate confirms
    • Each governor serves a 14-year nonrenewable, with one term expiring every even-numbered year. One of the Governors is also appointed by the President of the USA to chair the Board for a 4-year term, with no limit on reappointments
  52. Who is the FOMC? What do they do? How many times do they meet? Who do they consist of? Are they above or below the Board of Governors?
    • The FOMC stands for Federal Open Market Committee (the most powerful within the Fed)
    • They make decisions about open-market operations (purchases and sales of U.S. government securities by the Fed that affect the money supply and interest rates)[decide the interest rate
    • 8 times
    • Consist of 7 Board of Governors and 5 President Banks out of 12 (Out of the 5, 1 is the President Bank of New York)
    • They are on the same level as the Board of Governors
  53. What are Open Market Operations?
    Purchases and sales of government securities by the Fed in an effort to influence the money supply (lower or raise Money Supply or Interest Rate)
  54. What does the Federal Advisory Committee do? What do they consist of? Are they above or below the Board of Governors?
    • The Federal Advisory Committee is a committee that advises the board
    • They consist of a banker form each of the 12 Reserve bank districts
    • They are on the same level as the Board of Governors
  55. What is the hierarchy organization in the Federal Reserve System?
    • President appoints, Senate confirms
    • Federal Open Market Committee, Board Of Governors, Federal Advisory Committee
    • 12 Federal Reserve Banks
    • US Banking System: Commercial Banks, Savings Bank, Credit Unions
  56. How does the Federal Reserve System regulate the money supply?
    By using their tools which consist of: conducting open-market operations, setting the discount rate, setting legal reserve requirements for member banks
  57. What is the Discount Rate?
    The interest rate charged by Reserve banks for loans to member banks
  58. What is FDIC?
    • FDIC stands for Federal Deposit Insurance Corporation
    • Insurance to people to insure $250000 is guaranteed if bank was to fail.
  59. What are the Fed's goals?
    • The Fed's primary goals are price stability and maximum employment.
    • The Fed's additional recent goals are: economic growth, interest rate stability, financial market stability, and exchange rate stability