Econ 102-M01 TEST 1

Milton Friedman's famous quote

"Inflation is taxation without legislation."

Friedman's famous quote

"The most important single central fact about a free market is that no exchange takes place unless both parties benefit."

#1 Milton Friedman's famous quote

"inflation is always and everywhere a monetary phenomenon."

Definition of 'Quantity Theory Of Money'

An economic theory which proposes a positive relationship between changes in the money supply and the long-term price of goods. It states that increasing the amount of money in the economy will eventually lead to an equal percentage rise in the prices of products and services. The calculation behind the quantity theory of money is based upon Fisher Equation: Calculated as: Quantity Theory Of Money M*V = P*T Where: M represents the money supply. V represents the velocity of money. P represents the average price level. T represents the volume of transactions in the economy.

Explain the effect of increasing the money supply

An increase in the supply of money typically lowers interest rates, which in turns generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

Explain bank created money

Banks create money through the fractional reserve system. If you deposit $100,000 into a bank, they can typically lend out $1,000,000. What is loss by one bank is gain others. Where did that million bucks come from? Your deposit! They then lend out all that new money that didn't exist

1951 Treasury-fed accord

Agreement between the department of treasury and the fed, which restore the feds independence.

Definition of 'Phillips Curve'

An economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. According to the Phillips curve, the lower an economy's rate of unemployment, the more rapidly wages paid to labor increase in that economy.

'Acceleration Principle'

An economic concept that draws a connection between output and capital investment. According to the acceleration principle, if demand for consumer goods increases, then the percentage change in the demand for machines and other investment necessary to make these goods will increase even more (and vice versa). In other words, if income increases, there will be a corresponding but magnified change in investment.

Laissez Faire

An economic theory from the 18th century that is strongly opposed to any government intervention in business affairs. Sometimes referred to as "let it be economics."

Definition of 'Supply-Side Theory'

An economic theory holding that bolstering an economy's ability to supply more goods is the most effective way to stimulate economic growth.

M1

Coins, Currency, Demand Deposit

How do commercial banks create money

Commercial Banks make profit and generate revenue by two ways:1.By charging you a fee for the services they provide you 2.By lending the money you have deposited into your account, to other loan customers and getting an interest on the same. Interest income is the highest revenue and profit generator for any bank. And this is the non-fee based income for banks

Fiat money

Currency which the government declared to be legal tender, despite the fact that it has no natural value, or backed by a reserve.

The 1951 Accord

in 1951. In March of that year, the Federal Reserve System and the U.S. Treasury reached an agreement, known as the Accord, that recognized the independence of the Federal Reserve to conduct monetary policy. In the Fed's negotiations with the Treasury, the Fed was bolstered by Congressional support for an independent monetary policy. The modern conduct of discretionary monetary policy in the United States can be dated from the Accord.

RET

(Rational Expectations Theory) is An economic idea that the people in the economy make choices based on their rational outlook, available information and past experiences. The theory suggests that the current expectations in the economy are equivalent to what the future state of the economy will be. This contrasts the idea that government policy influences the decisions of people in the economy.

TIP

(Treasury inflation protection ) is A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation.

As a member of the FOMC, what should be done about stagflation? Unemployment at 8% and inflation at 9 %? Include in your essay a deficit of nearly $200 billion. Construct a model of the Fed's game plan including tools,operating and intermediate target and ultimate policy goals

.keep RR same, ^DR and FOMC Sell securities ....tightening money supply reduces inflation and lower DR allows for cheaper access to capital to encourage Capital Investment from falling significantly, thus only slowing down growth and decreasing inflation in the process. over time unemployment should slowly decline. tight and easy. ultimate goal is lower inflation, slow down economy but keep growth steady.

The Economic Recovery Tax Act of 1981 (ERTA, or the Kemp-Roth Tax Cut)

1) Reduced individual income tax rates, 2) accelerated expensing of depreciable property and 3) created incentives for small businesses and savings.

Describe the structure of the federal reserve System.

1)The presidentially appointed Board of Governors (or Federal Reserve Board), an independent federal government agency located in Washington, D.C. 2)The Federal Open Market Committee (FOMC), composed of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents, which oversees open market operations, the principal tool of U.S. monetary policy. 3)Twelve regional Federal Reserve Banks located in major cities throughout the nation, which divide the nation into twelve Federal Reserve districts. The Federal Reserve Banks act as fiscal agents for the U.S. Treasury, and each has its own nine-member board of directors. 4)Numerous other private U.S. member banks, which own required amounts of non-transferable stock in their regional Federal Reserve Banks. 5)Various advisory councils

What are the Policy Tools of the Government (e.g. U.S. Congress, Treasury Secretary)

Taxes; amount of government spending

Demand deposit

A bank deposit that can be withdraw "on demand". (www.amosweb.com)

What Phillips curve graph look like

A car wiper in opposite direction. It has abc points... exploiting this short-run tradeoff will raise inflation expectations, shifting the short-run curve rightward to the "New Short-Run Phillips Curve" and moving the point of equilibrium from B to C

Demand deposit multiplier

A function that describes the amount of money created in a bank's money supply. This money is created by lending money that is in excess of its required reserve to borrowers.

Definition of 'Deposit Multiplier'

A function that describes the amount of money created in a bank's money supply. This money is created by lending money that is in excess of its required reserve to borrowers. Calculated as: Deposit Multiplier=1/Required Reserved Ratio

Gold standard

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

Qualitative control

A major aspect of quality control is the establishment of well-defined controls. These controls help standardize both production and reactions to quality issues.

Balance-budget Amendment

A proposed amendment to the US Constitution that would constrain total government spending to be less than or equal to total tax collection.

RTC

A temporary federal agency established under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), enacted on Aug. 9, 1989, to resolve the savings and loan (S&L) crisis of the 1980s.

mon·e·ta·rism

A theory holding that economic variations within a given system, such as changing rates of inflation, are most often caused by increases or decreases in the money supply. A policy that seeks to regulate an economy by altering the domestic money supply, especially by increasing it in a moderate but steady manner.

Definition of 'Non-Marketable Security'

Any type of security that is difficult to buy or sell because it does not trade on a normal market or exchange. These types of securities trade over the counter (OTC) or in a private transaction. Finding a party with which to transact business is often difficult; in some cases, these securities can't be resold due to regulations surrounding the security.

On the other hand, what monetary policy would you recommend to the open market committee to deal with prolonged unemployment of the 8% over a two-year period with inflation rate of 3.5% and when? Construct a model of the Fed's game plan including tools,operating and intermediate target and ultimate policy goals

Buy short term securities, lower short term interest rate, . You would do these things in order to increase money supply, availability of credit, rise GDP, increase investment and lower Federal Fund Rate. Goal is ^GDP and ^Employment

Explain the causes of the current financial crisis of 2008. Name some possible solutions.

Deregulation of Banking, over inflated real-estate pricing, bad loans from banks, bad investment package MBS, short cash reserve and two unpaid wars Some possible solution are transparency laws, lower interest rates, increase cash reserve. increase money suppy and be a lender of last resort, ie GM, banks and Insurers

Explain Phillips Curve

Economists had frequently used the Phillips curve to explain the relationship between unemployment and inflation, and expected that inflation increased (in the form of higher wages) as the unemployment rate fell. The curve indicated that the government could control the unemployment rate, which resulted in the use of Keynesian economics in increasing the inflation rate to lower unemployment.

Explain 'Marketable Securities'

Examples of marketable securities include commercial paper, banker's acceptances, Treasury bills and other money market instruments.

Oct 6 1979

Federal reserve announce the tightening of the money supply. Under inflationary pressure in 1979, the Fed temporarily abandoned interest rate targeting in favor of targeting non-borrowed reserves. It concluded, however, that this approach led to increased volatility in interest rates and monetary growth, and reversed itself in 1982

Explain 'Monetary Base'

For example, suppose country Z has 600 million currency units circulating in the public and its central bank has 10 billion currency units in reserve as part of deposits from many commercial banks. In this case, the monetary base for country Z is 10.6 billion currency units. For many countries, the government can maintain a measure of control over the monetary base by buying and selling government bonds in the open market.

The K-Percent Rule

Friedman originally proposed that the central bank set targets for the inflation rate. To ensure that the central bank met this goal, the bank would increase the money supply by a certain percentage each year(3-5%), regardless of the economy's point in the business cycle. This is referred to as the k-percent rule. This had two primary effects: It removed the central bank's ability to alter the rate at which money was added to the overall supply, and it allowed businesses to anticipate what the central bank would do. This effectively limited changes to the velocity of money. The annual increase in money supply was to correspond to the natural growth rate of GDP.

Monetary control Act of 1980

Gave the federal reserve more control power towards non-member banks.

Fiscal Policy

Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883-1946), who believed governments could change economic performance by adjusting tax rates and government spending.

October 6, 1979

In July 1979, Paul Volcker was nominated, by President Carter, as Chairman of the Federal Reserve Board amid roaring inflation. He tightened the money supply, and by 1986 inflation had fallen sharply.[28] In October 1979 the Federal Reserve announced a policy of "targeting" money aggregates and bank reserves in its struggle with double-digit inflation

How can monetary and fiscal policy be coordinated? Cite recent-example, 1981-1982 and the present.

Monetary and fiscal policy can be coordinated by allowing the fed to increase the money supply and Govt. to lower taxes and also unemployment rate

Why The Fed was created?

National bank currency was considered inelastic because it was based on the fluctuating value of U.S. Treasury bonds rather than the growing desire for easy credit. If Treasury bond prices declined, a national bank had to reduce the amount of currency it had in circulation by either refusing to make new loans or by calling in loans it had made already. The related liquidity problem was largely caused by an immobile, pyramidal reserve system, in which nationally chartered country banks were required to set aside their reserves in reserve city banks, which in turn were required to have reserves in central city banks. The Panic of 1907 was the driving force in its creation.

Keynesian Liquidity Trap and its (graph)

Injections of cash to the private banking system, which has little or no effect on lending, borrowing, Investment or aggregate demand. (Graph is like a long tail graph or niche tail graph). The tail on the c curve would be constant (straight line)and represent the Liquidity Trap:.. the point where demand for money is perfect ly elastic.

What are the Policy Tools of the Fed

Interest rates; reserve requirements; currency peg; discount window; quantitative easing; open market operations; signalling

Definition of 'Laffer Curve'

Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve: The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.

Phillips curve

Inverse relationship between the route of unemployment and the route of inflation.

Monetary policy

Is controlling the money supply and interest rates by a central bank or monetary authority to stabilize business cycles, reducing unemployment and inflation, and promoting economic growth. (www.amosweb.com)

Compare and contrast Monetarism and Keynesian-ism.

Keynesian-ism emphasizes the role that fiscal policy can play in stabilizing the economy. In particular Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker. Keynesians' say it is a mistake to wait for markets to clear like classical economic theory suggests. Monetarism emphasizes the importance of controlling the money supply to control inflation. Monetarists are generally critical of expansionary fiscal policy arguing that it will just cause inflation or crowding out and therefore not help.

Recreate/retrace example of the Laffer Curve

Laffer Curve : shaped like upside down tray cover, starting from (0,0) to the end of X coordinate and a line perpendicular to the X line from inside top half of curve striaght down to the X (the point where the line touch the curve is T. Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.

Explain 'Laissez Faire'

Laissez faire is French for "leave alone." People who support a laissez faire system are against minimum wages, duties, and any other trade restrictions.

Example how banks create money

Lets imagine that out of this $ 1,000,000 bank keeps with it $ 100,000 (10% reserve) and lends rest of amount i.e 900,000 to X by cheque. Now A want to purchase a car worth $ 900,000, so he goes to Y and purchase it from him by giving him this cheque. Now Y deposits this cheque into another bank say TT Bank, this bank will again keep $90000 as reserve and will distribute rest of $810,000 to some other person Z. Now Z purchases a Machine worth $ 810,000 from W and gives him a cheque. So now W deposits this cheque into TTT bank, which again keeps 10% i.e $81000 and lends rest of amount to V i.e $729,000. So this process goes on n on n on.. So the total money created = 900,000+810,000+729,000= $ 2,439,000

What is the The Quantity of Money Formula

M * V = P * Y

M2

M1 and checking deposit

What is the Principle of Fiscal Policy

Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

What is the Principle of Monetary Policy

Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

What are marketable securities? Non-Marketable?

Marketable securities are securities sold on the open market/ publicly traded. Non-Marketable securities are securities that can not be sold on the open market example saving bonds

The 70's Failure of Phillips Curve and Keynesian policy

Monetarism rose to prominence in the 1970s, especially in the United States. During this time, both inflation and unemployment were increasing, and the economy was not growing(Stagflation). Paul Volcker was appointed as chairman of the Federal Reserve Board in 1979, and he faced the daunting task of curbing the rampant inflation brought on by high oil prices and the Bretton Woods system's collapse. He limited the money supply's growth (lowering the "M" in the equation of exchange) after abandoning the previous policy of using interest rate targets. While the change did help the inflation rate drop from double digits, it had the added effect of sending the economy into a recession as interest rates increased.

Monetarism School of thought

School of economic thought that maintains that the money supply is the chief determinant of economic activity. Milton Friedman and his followers promoted monetarism as an alternative to Keynesian economics ( John Maynard Keynes); their economic theories became influential in the 1970's and early 1980's. Monetarism holds that a change in the money supply directly affects and determines production, employment, and price levels, though its influence is evident only over a long and often variable period of time. Fundamental to the monetarist approach is the rejection of fiscal policy in favor of monetary rule. Friedman and others asserted that fiscal measures such as tax-policy changes or increased government spending have little significant effect on the fluctuations of the business cycle. They argued that government intervention in the economy should be kept to a minimum and asserted that economic conditions would change before specific policy measures designed to address them could take effect. Steady, moderate growth of the money supply, in their view, offered the best hope of assuring a constant rate of economic growth with low inflation. U.S. economic performance in the 1980's cast doubts on monetarism, and the proliferation of new types of bank deposits made it difficult to calculate the money supply.

Explain 'Non-Marketable Security'

Some examples of non-marketable securities are savings bonds, series (A, B, EE, etc.) bonds and private shares. The U.S. government offers both marketable and non-marketable securities to the public. Marketable securities, such as treasury bills and bonds can be purchased and resold to the public. But non-marketable securities, such as savings bonds, must be held by the holder until maturity and can't be resold to another party. Limited partnership (LP) interests are often difficult, if not impossible to resell.

Wage-price standards of 1978

Standards where companies including lawyers and doctors couldn't profit more than 6.5%

Summarize the strengths and weakness of monetary policy.

Strengths: 1. Does not cause deficit 2. Does not raise interest rates resulting in the "crowd-out" effect on investments(in other words it allows short-term growth damaging investments for long-term growth) Weaknesses: 1. Devalues the currency 2. Practicing monetary policy causes the central bank to lose control of currency valuation. 3. Lag

Summarize the strength and weakness of Fiscal Policy

Strengths: 1. Increase Demand 1. Lowers Unemployment 2. Influence willingness to spend Weaknesses: 1. Devalues the currency 2. cause deficit 3. Lag

Supply Side Economics

Stress that changes in aggregate supply are an active force in determining the levels of inflation, unemployment, and economic growth (pg 730).

Describe the structure of the federal reserve System. What is the importance of the federal Open Market Committee? Why was the fed created in 1913

Structure of the Federal Reserve System • Board of Governors-A several member group that manage the running of an institution • 12 federal reserve banks... • Federal open market committee (FOMC)-Aids the board of governors in conducting monetary policy The importance of the open market committee is to control the nation's money supply and influence interest rates. The reason why the fed was created was because of the bank crisis in 1907 which is why congress appointed the national monetary commission to study the monetary and banking problem thus creating the federal reserve.

Explain supply side economics, The Laffer Curve and the Kemp-Roth Act (ERTA). Why do supply sides recommend tax and spending cuts to remedy stagflation. Has it worked as of now?

Supply-Side-Economics-the school of economic theory that stresses the costs of production as a means of stimulating the economy; advocates policies that raise capital and labor output by increasing the incentive to produce laffer Curve- embodies a tenet of supply side economics: that government tax revenues from a specific tax are the same (nil) at 100% tax rates as at 0% tax rates respectively. The tax rate that achieves optimum, or highest government revenues is somewhere in between these two values. Officially titled the Economic Recovery Tax Act of 1981, this was a cornerstone of economic policy under President Reagan. The three components of this act were: (1) a decrease in individual income taxes, phased in over three years, (2) a decrease in business taxes, primarily through changes in capital depreciation, and (3) the indexing of taxes to inflation, which was implemented in 1985. While it worked to remedy Inflation

Explain 'Supply-Side Theory'

Supply-side theorists advocate income tax reduction because it increases private investment in corporations, facilities, and equipment.

How the 1951 Accord come about

The 1951 Accord, also known simply as the Accord, was an agreement between the U.S. Department of the Treasury and the Federal Reserve that restored independence to the Fed. During World War II, the Fed pledged to keep the interest rate on Treasury bills fixed at 0.375 percent. It continued to support government borrowing after the war ended, despite the fact that the Consumer Price Index rose 14% in 1947 and 8% in 1948, and the economy was in recession. President Harry S. Truman in 1948 replaced then Chairman of the Federal Reserve Marriner Eccles with Thomas B. McCabe for opposing this policy, although Eccles's term on the board would continue for three more years. The reluctance of the Fed to continue monetizing the deficit became so great that in 1951, President Truman invited the entire Federal Open Market Committee to the White House to resolve their differences. William McChesney Martin, then Assistant Secretary of the Treasury, was the principal mediator. Three weeks later, he was named Chairman of the Fed, replacing McCabe.

Tax Act of 1981

The Economic Recovery Tax Act of 1981 (Pub.L. 97-34), also known as the ERTA or "Kemp-Roth Tax Cut", was a federal law enacted in the United States in 1981. It was an act "to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purposes".[1] Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 23% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%. This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. Additionally the tax rates were indexed for inflation, though the indexing was delayed until 1985. The Act's Republican sponsors, Representative Jack Kemp of New York and Senator William V. Roth, Jr., of Delaware, had hoped for more significant tax cuts, but settled on this bill after a great debate in Congress. It passed Congress on August 4, 1981, and was signed into law on August 13, 1981, by President Ronald Reagan at Rancho del Cielo, his California ranch.

Explain 'Federal Open Market Committee - FOMC'

The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does by buying and selling government securities. For example, to tighten the money supply, or decrease the amount of money available in the banking system, the Fed sells government securities. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.

Explain the Treasury-Fed Accord or 'Monetary Accord Of 1951'

The Fed first acquired responsibility for setting monetary policy in 1913. Through monetary policy, the Fed (the U.S.'s central bank) is able to manipulate the money supply and affect interest rates. While some people believe that the Fed is necessary to smooth out the ups and downs in the economy, others believe that its policies are in fact responsible for the booms and busts of the business cycle.

FDIC

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation operating as an independent agency created by the Banking Act of 1933.

October 6, 1979,

The Federal Reserve adopted new policy procedures that led to skyrocketing interest rates and two back-to-back recessions but that also broke the back of inflation and ushered in the environment of low inflation and general economic stability the United States has enjoyed for nearly two decades

Explain 'Deposit Multiplier'

The Federal Reserve and other central banks require that banks must hold a minimum amount (required reserve) of money in their reserves in order to fulfill withdrawal requests from depositors. Banks are then allowed to lend out any excess to borrowers (such as for mortgages), while the liability incurred as a result of depositors is still on the books. For example, suppose that the required reserve ratio is 25%. This means that the deposit multiple is four. For banks, this means that for every $4 that is deposited, a total of $1 must be kept in reserves.

Explain the function of the federal reserve system. What is the most important and why?

The Federal Reserve's most primary function is to control inflation without triggering a recession. In addition to that, the Fed has three other less visible, but no less critical, functions, Supervise the nation's banking system to protect consumers, Maintain the stability of the financial markets and constrain potential crises, Be the central bank for other banks, the U.S. Government, and foreign banks. (NOT FULL ANSWER)

FSLIC

The Federal Savings and Loan Insurance Corporation (FSLIC) was an institution that administered deposit insurance for savings and loan institutions in the United States. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished it and transferred the responsibility for savings and loan deposit insurance to the Federal Deposit Insurance Corporation (FDIC). The FSLIC was created as part of the National Housing Act of 1934 in order to insure deposits in savings and loans a year after the FDIC was created to insure deposits in commercial banks. It was administered by the Federal Home Loan Bank Board (FHLBB).

Summary of The Kemp-Roth provisions

The Office of Tax Analysis of the United States Department of the Treasury summarized the tax changes as follows: 1) phased-in 23% cut in individual tax rates over 3 years; top rate dropped from 70% to 50% 2) accelerated depreciation deductions; replaced depreciation system with ACRS 3) indexed individual income tax parameters (beginning in 1985) created 10% exclusion on income for two-earner married couples ($3,000 cap) 4) phased-in increase in estate tax exemption from $175,625 to $600,000 in 1987 5) reduced windfall profit taxes allowed all working taxpayers to establish IRAs 6) expanded provisions for employee stock ownership plans (ESOPs) 7) replaced $200 interest exclusion with 15% net interest exclusion ($900 cap) (begin in 1985) *** The accelerated depreciation changes were repealed by Tax Equity and Fiscal Responsibility Act of 1982 and the 15% interest exclusion repealed before it took effect by the Deficit Reduction Act of 1984.

Tax Reform Act of 1986

The U.S. Congress passed the Tax Reform Act of 1986 (TRA) enacted October 22, 1986) to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences.

Acceleration view

The acceleration principle has the effect of exaggerating booms and recessions in the economy. This makes sense, as companies want to optimize their profits when they have a successful product, investing in more factories and capital investments to produce more. If a recession hits, they will reduce investment. This investment reduction can increase the length of the recession. This is because less investment means less jobs created, and so on.

Explains 'Rational Expectations Theory'

The idea is that rational expectations of the players in an economy will partially affect what happens to the economy in the future. If a company believes that the price for its product will be higher in the future, it will stop or slow production until the price rises. Because the company weakens supply while demand stays the same, price will increase. In sum, the producer believes that the price will rise in the future, makes a rational decision to slow production and this decision partially affects what happens in the future.

Definition of 'Federal Open Market Committee - FOMC'

The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms

What is the Definition of 'Federal Open Market Committee - FOMC'?

The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms.

Effect and controversies Kemp-Roth

The most lasting impact and significant change of the Act was the indexing of the tax code parameters for inflation. Of the nine federal tax laws between 1968 and this Act, six were tax cuts compensating for inflation driven bracket creep.[2] Following enactment in August 1981, the first 5% of the 25% total cuts took place beginning in October of the same year. An additional 10% began in July 1982, followed by a third decrease of 10% beginning in July 1983. As a result of ERTA and other tax acts in the 1980s, the top 10% were paying 57.2% of total income taxes by 1988—up from 48% in 1981—while the bottom 50% of earners share dropped from 7.5% to 5.7% in the same period.[3] The total share borne by middle income earners of the 50th to 95th percentile decreased from 57.5% to 48.7% between 1981 and 1988. Much of the increase can be attributed to the decrease in capital gains taxes, while the ongoing recession and subsequently high unemployment contributed to stagnation among other income groups until the mid-1980s. Another explanation is any such across the board tax cut removes some from the tax rolls. Those remaining pay a higher percentage of a now smaller tax pie even though they pay less in absolute taxes. In addition to changes in marginal tax rates, the capital gains tax was reduced from 28% to 20% under ERTA. Afterwards revenue from the capital gains tax increased 50% by 1983 from $12.5 billion in 1980 to over $18 billion in 1983.[3] In 1986, revenue from the capital gains tax rose to over $80 billion; following restoration of the rate to 28% from 20% effective 1987, capital gains revenues declined through 1991. Critics claim the tax cuts worsened the deficits in the budget of the United States government. Reagan supporters credit them with helping the 1980s economic expansion[6] that eventually lowered the deficits. After peaking in 1986 at $221 billion the deficit fell to $152 billion by 1989.[7] Supporters of the tax cuts also argue, using the Laffer curve, tax cuts increased economic growth and government revenue. This is hotly disputed—critics contend that, although government income tax receipts did rise, it was due to economic growth, not tax cuts, and would have risen more if the tax cuts had not occurred; the Office of Tax Analysis estimates that the act lowered federal income tax revenue by 13% relative to where it would have been in the bill's absence.

Definition of 'Velocity Of Money'

The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.

Why was the Fed Created

The reason why the fed was created was because of the bank crisis in 1907 which is why congress appointed the national monetary commission to study the monetary and banking problem thus creating the federal reserve.

'Monetary Base'

The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies. Also known as the "money base"

Monetary Base

The total of currency held by the non-bank public, vault cash held by banks, and federal reserve deposit of the bank.(High power money).

Explain 'Money Supply'

The various types of money in the money supply are generally classified as "M"s such as M0, M1, M2 and M3, according to the type and size of the account in which the instrument is kept. Not all of the classifications are widely used, and each country may use different classifications. M0 and M1, for example, are also called narrow money and include coins and notes that are in circulation and other money equivalents that can be converted easily to cash. M2 included M1 and, in addition, short-term time deposits in banks and certain money market funds.

Explain 'Fiscal Policy'

To illustrate how the government could try to use fiscal policy to affect the economy, consider an economy that's experiencing a recession. The government might lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest. Increased consumer spending or investment could improve economic growth. Regulators don't want to see too great of a spending increase though, as this could increase inflation. Another possibility is that the government might decide to increase its own spending - say, by building more highways. The idea is that the additional government spending creates jobs and lowers the unemployment rate. Some economists, however, dispute the notion that governments can create jobs, because government obtains all of its money from taxation - in other words, from the productive activities of the private sector.

1979

Under inflationary pressure in 1979, the Fed temporarily abandoned interest rate targeting in favor of targeting non-borrowed reserves. It concluded, however, that this approach led to increased volatility in interest rates and monetary growth, and reversed itself in 1982

Explain 'Velocity Of Money'

Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy's inflation calculation. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

Definition of 'Marketable Securities'

Very liquid securities that can be converted into cash quickly at a reasonable price. Marketable securities are very liquid as they tend to have maturities of less than one year. Furthermore, the rate at which these securities can be bought or sold has little effect on their prices.

If you were a member of the federal open market committee, what monetary policy would you suggest and why based on the following facts: if inflation were 18% and unemployment 6 % ?Construct a model of the Fed's game plan including tools,operating and intermediate target and ultimate policy goals

^RR,^DR,Sell securities, increase interest rate. Short term goal is to tighten the money supply. Decreasing investment and thus lower GDP and Inflation. tighten the money supply

Explain The primary tool of monetary policy

is open market operations: the central bank buys and sells financial assets such as treasury bills, government bonds, or foreign currencies. Purchases of these assets result in currency entering market circulation, while sales of these assets remove currency. Usually, open market operations aim for a specific short term interest rate. In other instances, they might instead target a specific exchange rate relative to some foreign currency, the price of gold, or indices such as the Consumer Price Index. For example, the US Federal Reserve may target the federal funds rate, the rate at which member banks lend to one another overnight. Other monetary policy tools to expand the money supply include decreasing interest rates by fiat; increasing the monetary base; and decreasing reserve requirements. Some other means are: discount window lending (as lender of last resort); moral suasion (cajoling the behavior of certain market players); and "open mouth operations" (publicly asserting future monetary policy). The conduct and effects of monetary policy and the regulation of the banking system are of central concern to monetary economics.

V= (P*Y)/M

is the Frequency at which one unit of Currency is used to purchase domestically-produced goods & services within a given time period.

What is Fiscal policy

is the use of government expenditure and revenue collection to influence the economy.

Wage-Price restraint of 1978

to help fight Inflation President Carter called for limit in wage increase to max of 7% and price increase 5.75%

Velocity of money

velocity = (price level * real GDP) / quantity.

Function of money

• Medium of exchange • Unit of account • Store of value