Economics Unit 5 Test Study Guide (CH 15 & 17)

New programs to improve the economy

Term auction facility (TAF) - The fed provides loans with terms of 28-84 days -interest rates on these loans determined at auctions -bidders are depository institutions -allows for financial institutions to borrow money at interest rates below the discount rate Term Securities Lending Facility (TSLF): -lends treasury securities to primary dealers (investment banks and securities firms authorized to deal directly with the fed) Primary dealer credit facility (PDCF) - increase the total supply of financial reserves in the banking system -lends money to primary dealers at the primary credit rate-- the discount rate paid by the most financially sound institutions -Goal of the programs was to make loans available and add money to the economy

bailout

is an infusion of money, usually in the form of loans or stock purchases, to keep a firm from failing.

T or F: Despite early attempts banks were not lending enough money. Housing was in collapse, values of stock and securities fell. Some banks had trouble raising capital.

True

What is the largest source of federal income?

the interest it receives on government securities which it buys through the federal open market committee

Reserve Requirements

the percentage of demand deposits that banks must keep on hand. The Fed does not change this often but it is powerful when they do. -the FED uses the reserve requirement more to ensure the stability of the baking system than as a tool of monetary policy -raise RR-- keep more money, less to lend-- economy contracts -lower RR-- keep less money, more to lend-- economy expands

T or F: Whether or not a bank joins the federal reserve system, it can use the financial services offered through the FR bank in its district

True

the amount to be repaid is called the

face value or par value

Increases in the money circulation causes interest rates to _____ and encourages business and consumer spending to ____.

fall rise

T or F: The fed acted on a series of "unusual powers" in the crisis of 08

true

The budget appears on the president's desk not as a single document but as 13 separate spending bills known as _______ _____.

appropriations bills

In addition to the other securities, the U.S. government also sells Treasury Inflation-Protected Securities (TIPS). What are these?

are U.S. Treasury securities that protect investors against inflation because the amount to be repaid rises with inflation. -the protection comes from the adjustment of the amount to be repaid with the consumer price index -issued in terms of 5, 10, or 30 and are offered with a par value of $100 -sold at auctions and offered interest payments every six months

fiscal year

for the federal government is the period over which the federal budget applies. It begins on October 1 and ends on September 30.

Mandatory Spending

- Controversial to change the very popular entitlement programs like Social Security and Medicare. Congress must change the law. - Strong lobbying efforts for specific spending like national defense, medical research, environmental protection and others.

Reasons for Annual Deficits

- Most are planned to achieve worthwhile payoffs. - As economic performance falters, social services increase and government tries to jump-start the economy with spending and assistance.

Important things to note about FRB

-12 District and 24 branch banks; each has 9- member board of directors -operating arm of the Federal reserve -implement fed's policies and laws passed by congress that relate to the banking industry -monitor economic health of their region and report back to the fed -Hold cash reserves and make loans for depository institutions -Act as agent for federal government including issuing and redeeming government securities -supervise and act as bank examiner for member banks of the federal reserve system

Examples of Discretional fiscal policy

-Change in tax rates on individuals or corporations -Extending unemployment benefits beyond 26 weeks -Public works programs called infrastructure improvements -Tax surcharges -Change in tax deductions -Changes in business taxes and deductions

Important things to note about BOG

-Manage the operations of the Federal Reserve System Serve 14-yr terms; appointed by President -may only serve one full term -Oversees operations of the Federal Reserve Banks -Chair and Vice Chair chosen by members -serve as 7 of the 12 members on the federal open market committee -Set Monetary Policy for the nation -oversee working of federal reserve banks; writes banking regulations and supervises compliance of member banks and bank holding companies

What services do these include?

-check clearing -electronic funds transfer -distribution of currency

Negative impacts of crowding- out effect

-development of new products and technologies can be put off -productivity can decline and workers' incomes can suffer

Effects of national debt (undesirable)

-higher interest rates -a burden on the future generations -vulnerability due to foreign debt ownership

Limits of fiscal policy

-mandatory spending -inside lag -outside lag -unintended consequences

Important things to note about MB

-must place 3% of their financial capital in the federal reserve bank in their district to help finance its operations -in exchange, they are considered stock holders in the district bank and receive an annual dividend up to 6 percent to their investment -they get to elect 6 of the 9 of their district's board of directors

Major federal government entitlement programs

-social security -disability insurance -medicare -medicaid -supplemental nutrition assistance program (food stamps) -temporary assistance for needy families -unemployment insurance

Good news about debt

-the government can collect taxes -the government can also print money -the debt is as large as it has ever been but so is GDP

Keynesian economics

-the government needs to step in at witness with fiscal policy to help the economy in the short term -when the economy is left alone it can fail to steer itself out of a rut for a painfully long time

Mandatory spending

is spending that is required by existing law. 2/3 of federal budget

national debt

is the amount of money that the federal government has borrowed over time to fund annual budget deficits and has not yet repaid. -also includes interest paid to investors who lent the government money to cover the debt by purchasing U.S. treasury securities

crowding- out effect

is the constraint on private sector borrowing that results from higher interest rates due to government borrowing.

budget deficit or budget surplus

is the difference between the amount of government payments and the amount of government revenues in a particular year. It is a deficit when the payments exceed the revenues and a surplus when the revenue exceeds the payments

Federal Open Market Committee

is the group within the Federal Reserve that creates monetary policy.

debt limit

is the highest amount that the national debt can reach, as authorized by Congress.

intragovernmental debt

is the money the federal government owes to government programs such as Social Security and Medicare.

outside lag

is the time between a policy action and the resulting effect on the economy.

recognition lag

is the time it takes economists and government officials to realize that the economy is experiencing a problem. -forecasts can be inaccurate and there may be disagreement about how to interpret available information -also need to check if automatic stabilizers are enough to turn the economy around

Fiscal policy

is the use of government spending and taxation to pursue economic growth, full employment, and price stability.

The leftward shift of the AD results in a ____ price level but _____ RGDP.

lower lower

Tax Revenues

rise in expansionary periods and fall in recessionary periods

Transfer Payments

rise in recessionary period and fall in expansionary periods -increase budget deficit in recessionary periods

The federal government is ____ _______ meaning its income comes from the services it provides, not the federal government

self supporting

The payment of interest on the national debt is called _____ ___ ____.

servicing the debt.

If continuous resolutions were not passed, the agencies would have to...

shut down

Deficit spending

spending in excess of revenues

All levels of government raise revenue through _______.

taxation

Federal Reserve

the central bank of the United States, buys US government securities.

public debt

the money owed to investors (individuals, banks, pension funds, fund managers, insurance companies, both domestic and foreign) by the federal government.

Three major tools FED uses to influence the economy

1. open makers operations 2. discount rate 3. reserve requirements

Tight money policy

decreases the money supply. -used when economy is growing, prices are rising, and inflation seems likely -increases interest rate and discourages new investment -result is a smaller economy

Mixed Results

-Inflation remained in check -Avoided a double dip recession -Stock markets rebounded -Unemployment remained high near 9% thru 2011 -Treasury made a profit from TALF (3M auto loans, 1M student loans, .9M small business loans) -"Occupy Wall Street" protests raised concerns about corporate leaders faring well while employees did not -"Moral hazard" debated from too many safety nets -No shortcuts from a severe recession

Three Advantages of Monetary Policy

-Quick policy adjustments An FOMC meeting can take place quickly and decisions are quick as well. -Flexibility The FOMC can change the money supply in minutes if necessary. -Free of political influence The members of the FOMC serve long terms and are not elected.

Examples of unusual powers

-Rescuing a brokerage firm -bailing out AIG -intervention in the house market -Intervention in Consumer Debt --->Term Asset Backed Securities Loan Facility (TALF): one year loans on financial institutions that give car loans, student loans, and credit card loans -Glimmers of Hope

Factors that Limit the Success of Fed Policy:

-Time lags It takes time to recognize what is happening in the economy and time to make a change to positively change the economy. -Pessimism People sometimes worry about their job or their income and hold onto their money, which slows the economy down.

Interest dates on the demand curve

-as the interest rate rises, so does the opportunity cost of holding money -a higher interest rate makes investments more attractive -if people hold onto their money they fail to gain the benefit from the higher interest rates and the quantity of money demanded decreases -wehn the interest rate falls, the lower opportunity cost of holding money leads to an increase in the quantity of money demanded INVERSE RELATIONSHIP BETWEEN THE INTEREST RATE AND QUANTITY OF MONEY RESULTS IN A DOWNWARD SLOPING MONEY DEMAND CURVE

The Great Depression and Reforms to the Fed

-improve the tools for monetary policy -bank holding companies Changes due to the Great Depression: -Glass-Steagall Act 1933: expanded duties of the fed--became responsible for open market operations -Examine and regulate bank holding companies -Laws in 1935 (FOMC), 1946 (focus MP on full employment, price stability, and economic growth), and 1956 (regulating bank holding companies) expanded the Fed's role.

The Money Market

-involves the manipulation of the money supply -The price of money is an interest rate on graph -money supply is also fixed on graph

Great Recession of 2007-2009

-mortgages holders were unable to make payments-- banks not being repaid so had relatively little money to lend -Credit crisis: (happened in europe) housing boom on collapse and limited availability for loans -Bank runs: worried depositors running to the banks and asking for their money back -Bailouts: Bank of england steps in to keep firms from falling apart

Changes in prices or income affect the demand for money. Explain.

-price level rises -people need more money to buy goods and services -demand for money increases -prices decline -less money is needed to buy goods and services/higher income -demand for money decreases

The Fed's Initial Reactions

-wanted to stabilize the economy and get money flowing to businesses and consumers -Cut federal fund rate and discount rate -Attempts to calm the economy

Federal Reserve Banks also provide two other additional types of services through the fed's nationwide electronic payment system which are

1. fed wire: provides a secure communications network for transmitting large payments between the federal reserve banks for business costumers 2. Automated learning house (ACH): carries out relatively small CH transfers between the counts of payers and payees without the use of checks

Organizational structure of the federal reserve

1. FOMC--BOG--FAC 2. FRB 3. MB 4. American people

Steps in inflation targeting:

1. Set inflation targets for future time periods. 2. Establish an inflation forecasting model based on a variety of inflation indicators. 3. Provide a regular process for adjusting policy in response to forecasts in order to hit the targets.

The Federal Reserve Act of 1913

A depression in 1893 convinced Americans that a central bank could provide stability. Conservatives wanted the FED to privately owned and not regulated by the government but by the Federal Reserve Board. Reformers want a banking system owned and regulated by the Federal government. Resulting act was a compromise. The nation's banks remained privately owned but were to be regulated by the Federal Reserve Board-- board of governors, districts, and everything was apart of that too! The district banks had a lot of power a first but the federal reserve system has undergone many changes

If the economy is slow and needs an infusion of money the FR will ____ treasury securities.

BUY

If the Fed wants to decrease interest rates in will ____Treasuries.

BUY -makes investment more attractive

Open Market Operations

Fed action that buys or sells Treasury securities on the open market. -primary monetary policy tool

How does increasing and decreasing money supply affect interest rate?

Fed increases money supply--> lower interest rate--> economy expands because more investment is made Fed decreases the money supply--> interest rate increases --> economy contracts because less investment is made

Board of governors receives reports and advice from what three federal advisory councils/committees:

Federal advisory council: expertise on economic and banking matters Consumer advisory council: advises the board on issues relating to consumers and the financial services industry Thrift institutions advisory council: informs the board about matters rated to thrift institutions including savings and loans associations, savings banks, and credit unions

The Federal Reserve and the Federal Government

It is the federal government's bank, processing tax revenues and payments. -- through district banks It acts as the fiscal agent for the federal government, the Fed sells, redeems, and pays out Interest on government securities. It puts into circulation the money that the Department of the Treasury produces.-- getting it out to commercial banks and the public

If the Fed wants to increase interest rates it will ____ Treasuries.

SELL -makes investment less attractive

If the economy needs to ward off inflation and tighten the money supply, the Fed ____ treasury securities.

SELLS

T or F: The fed is also a "lender of last resort" for financial institutions

True -FRB frequently lend money to banks for short term needs -under unusual conditions like a recession the FED may need to lend money to banks to keep them operating

ACH (automated clearing house) transfers

are transfers between payers' and payees' accounts carried out without the use of checks on a secure electronic funds-transfer network.

Bank holding committees

companies that control one or more bis

Collateral

for a loan is an asset that must be forfeited to the lender if the loan is not paid back - used to secure a loan

Easy money policy

increases the money supply. -used when the economy is slow -lowers interest rate -encourages new investments -economy expands

Monetary policy

is meant to moderate the peaks and valleys of business cycles.

federal funds rate

is the interest rate that commercial banks charge one another for short- term loans. -during inflationary times, the FOMC wants to tighten their money supply, so it raises the federal funds rate-- sell securities -recessionary period coming-- lower the federal funds rate- -buy securities

discount rate

is the interest rate that the Fed charges financial institutions for short- term loans. -by raising and lowering the DR, the fed can influence the activity of banks -increasing makes it more expensive to borrow form the fed-- economy slows -opposite is true

The Federal Reserve and Financial Institutions-- check clearing

is the processes of removing money from the bank account of the person who wrote the check— the payer— and delivering it to the account of the check's recipient— the payee.

Fed monitors economic indicators closely and changes monetary policy in response to...

shifts towards inflation or recession

The Fed is also a regulator and they ...

supervise banking operations to determine risk. -ensure safety of banking system and stability of financial markets -through district banks, FED supervises U.S. bank holding companies, financial holding companies and state member banks

Monetary policy

the actions taken by the central bank to manage interest rates and the money supply in pursuit of macroeconomic goals

inflation targeting

the central bank sets a target rate— or range— of inflation for some time in the future and develops monetary policy with that goal in mind.

American international group (AIG)

the world's largest insurer operating in 130 countries -major provider of credit default swaps

4 main purpose of the FED

Conducting the nation's monetary policy with the goals of maintaining Full employment and price stability to promote economic growth. Regulating, supervising, and examining the nation's banks to ensure the safety of the banking system. Stabilizing and limiting risk to the financial system. Provide financial services for the federal government and serving as the "banker's bank" for commercial banks and other depository institutions-- this includes holding cash reserves for them, processing checks, and providing electronic payments

Where does the budget go next? What does this office do?

Congressional budget office they review the budget, congressional committees hold hearings, and Congress develops its own version of the budget

Investors can make smaller investments in the government by buying...

E, EE, or I savings bonds - start at $25 or $50

The crafting of the budget begins with what office? What are they and what do they do?

Office of management and Budget they are a component of the Executive Office of the President working to align the requests of the federal agencies with the President's priorities

Is the Federal Reserve one big bank?

No it is a central banking system with major banks in 12 districts and 24 branch banks

Effects of the national debt

The Burden on Future Generations The payment of interest on the national debt is called servicing the debt. As the size of the debt grows, the amount of the interest payments must be increased. The Risk of Foreign Investment As foreigners buy our debt, the interest payments end up outside the US economy. Without this foreign buying of our debt, we would have less to spend and boost the US economy. Some Good News about the National Debt Taxation, printing money, and the ability to pay the interest on the debt is relatively positive news.

In addition to discretionary fiscal policies, the economy has a set of existing programs known as Automatic stabilizers. What are these and what do they do?

are changes in taxation and transfer payments that moderate changes in GDP and do not require authorization from the government. -function: smooth out the business cycle and help prevent a slide into a recession or inflationary period

Transfer payments

are payments for which the government receives no goods or services in return.

Dividends

are payments made out of a corporation's profits to owners of its stocks. The federal government makes interest/coupon payments to US debt owners.

Entitlement programs

are programs that people are entitled to by law if they meet certain qualifications.

How are future programs endangered by this?

because future tax payments must go towards servicing the debt as the national debt grows, interest payments take up a larger chunk of the annual federal budget

When the government spends more than it takes it in, it...

borrows to make up the difference

If an appropriations bull has been help up beyond the beginning of the new fiscal year, Congress must pass and president must sign a _______ _______ which enables the agencies to...

continuous resolution fund operations based on the previous year's funding

Every 6 months, buyers of T-notes and T-bonds receive_______ _______, which are...

coupon payments payments of a small percentage of the face value of their securities

Means tested

eligibility depends on the prospective recipient's income

inside lag Also what are the two types

delay between the onset of a problem and the implementation of a solution. -recognition and implementation

Fiscal policy can affect economic equilibrium by changing aggregate_____.

demand

As mandatory spending increases each year, the scarcity of dollars limits the amount to be used for....

discretionary spending

About 2/3 of aggregate demand is made up of consumer demand which is influenced by the amount of ______ ___ available to household

disposable income

By altering tax policy or transfer payments, fiscal policy can directly affect....

disposable income

It does so by selling _______ ______ of various types, which represent...

government securities a promise to repay a certain amount of money over time

Because the coupons are payments, the purchase price for a security is sometimes...

greater than the face value

Each year the government runs a deficit and borrows more money, and the size of the interest payment...

grows

when there is an annual budget deficit, the national debt...

grows

The rightward shift of the AD results in a _____ price level but _____ RGDP.

higher higher

12 Federal Reserve Banks

implement Federal Reserve policies and provide services to member banks and federal government agencies in their district

The federal reserve is an...

independent body within the federal government

Treasury note (T- note)

is a U.S. Treasury security that pays interest in the form of coupon payments and matures in 2, 3, 5, or 10 years.

Treasury bond (T- bond)

is a U.S. Treasury security that pays interest in the form of coupon payments and matures in 30 years.

balanced budget

is a budget designed to equate expected revenues with planned expenditures.

federal budget

is a plan for how the federal government will spend money over the coming fiscal year.

Treasury bill (T-bill)

is a security issued by the U.S. Treasury that matures in 4, 13, 26, or 52 weeks.

Discretional fiscal policy

is any Congressional action to increase or decrease taxes and/or change the level of government spending.

Expansionary fiscal policy

is any combination of government spending and tax cuts meant to spur the economy. -used when the country is on the brink of a recession to give an economy a boost -lower taxes and more government spending on purchases or transfer payments - if successful the result will be a rightward shift in aggregate demand

Contractionary fiscal policy

is any combination of government spending cuts and tax increases meant to slow the economy down. -used when the economy is in danger of expanding to o quickly and overheating -raises taxes, cuts government spending, or both -government's aim is to reduce aggregate demand as it is rising faster than aggregate supply -aggregate demand shifts left

Discretionary spending

is government spending that is not required by law; rather, it is authorized annually by Congress and the president.

debt to GDP ratio

is important in evaluating a nation' s ability to repay the debt.

Disposable income

is income after taxes have been removed. -This is the money now available for either spending or saving.

Demand-side policy

is policy meant to stabilize or stimulate the economy by changing aggregate demand.

Supply-side policy

is policy meant to stimulate the economy by increasing aggregate supply. -agg sup increases when the cost of producing goods and services decreases -lower taxes of firms or less gov reg decreases the cost of production -results in increased agg sup that can boost the RGDP and decrease the PL -down side of lower taxes can be a decrease in the tax collection and an increase in the national debt

Unintended Consequences

means poorly timed efforts can push the economy in the opposite direction of what is intended.

When the Federal Reserve uses money that was not in circulation to purchase securities, the practice is called ___________ ___ ____.

monetizing the debt

if the budget is is successfully balanced, what happens to the national debt?

no change occurs

Macroeconomic equilibrium

occurs when aggregate supply equals aggregate demand.

Member banks

of the Federal Reserve System include all nationally chartered banks and many state- chartered banks. They are stockholders in their district bank and help elect the district's board of directors.

Board of Governors

of the Federal Reserve is made up of seven members appointed by the president.

What tool of monetary policy foes the FOMC exercise?

open market operations to manipulate the cost and availability of money in the economy -also oversees Fed's operations in foreign exchange markets and the U.S. securities market

The budget plan is not only a spending plan but also a...

political document

As investors buy the government debt, they have less funds for _____ _______.

private investment.

In the pursuit of money to borrow, the federal government competes with the _____ _____ for investors' dollars

private sector

The national debt consists of two categories:

public debt intragovernmental debt

When the government is in danger of reaching this limit, Congress must...

raise it or the government will no longer be authorized to borrow

Classical economics

the school of economic though that supports minimal economic intervention -economy will regulate itself over time if left alone

implementation lag

the time between the recognition of a problem and the decision about what to do about it -can take president an congress months to agree what to do