Economics Chapter 14 and 15

.What is a positive rate of time preference?

.placing a higher value on present enjoyment rather than enjoyment in the distant future

What is the essential characteristic of money?

acceptability; generally acceptable

What happens when the government sells bonds?

bank pays for them in money and decreases their supply of money

Who creates money/

banks and the FED

Why does a fiat money system working?

because we think it does and assume it does and everyone knows they can use their money as money

total expenditures of the government exceeds total tax revenue

budget deficit

total tax revenue exceeds total expenditures of the government

budget surplus

Why does GDP not just continue to grow non-stop?

business cycles

What is the demand in the market for loanable funds?

business investment

To what would Karl Marx and Engels have attributed the Great Depression?

capitalism breaking down because it produced too much - instability of the free market

What makes up our supply of money?

cash, bank notes, anything that the banks accept as deposit

Why is a recession a postive thing?

correction of the errors and helps get the resources where they need to be

What is considered money?

currency and checkable deposits

Has the United States recently had most budget dificits or surpluses?

deficits

What comprises the supply of credit or loanable funds?

deposits of other people in the banks

How is a recession a market correction?

entrepreneaurs recalculate and change their plans; productive resources get moved to places where they are valued more - moving jobs

What is the best explanation of the business cycle?

entrepreneurial view - decide they want to market a certain thing, borrow money and start a business, not necessarily successful

Taxes placed on a specific item

excise taxes

What is it called when there is nothing backing the money?

fiat system

What are credit markets?

financial markets - markets in which people can do things like save, borrow, lend

What does the FED do?

fixes legal reserve requirements for banks

How do timing lags affect the effectiveness of fiscal policy?

government cannot determine fiscal policy based on the current conditions because it would not be put into play for a couple months

2 drawbacks of monetary policy

higher inflation and benefits are always temporary

What is the supply of the market for loanable funds?

household savings

How do banks earn a profit?

investing the money that people deposit in the bank in loans and charging interest on these loans

How does the market-determined interest rate coordinate saving and investment?

lower interest rates encourage people to invest

What is the one way fiscal policy would probably work? Why?

lowering taxes would generate more spending because more people would work and make more to spend

What kinds of errors are causing entrepreneaurs to make mistakes?

misreading signals or investing in things they cannot pay off

What are 2 ways we have tried to fix the fluctuating business cycles?

monetary and fiscal policy

what we use to exchange for things

money

How do banks and the FED create money?

money is deposit, they save some and loan out the excess, money is deposited into someone else's account and it continues to grow

term that means how much money is in the economy

money supply

what happens when the government buys bonds?

money supply increases

What is the most common technique the FED uses for manipulating the nation's money supply?

open market operations

What are 2 errors that cause business cycles?

overestimating and underestimating profit making ability

When the government spends more, how do people react? What is the term for this?

people save more because they think taxes will increase; crowding out

What are open market operations?

purchase and sale of government bonds by the federal reserve to/from banks

What is the difference between a real and nominal interest rate?

real interest rate is the amount the bank really earns; the nominal is the amount that accounts for inflation and isn't really earned due to inflation

a situation in which a majority of the decisions being made by entrepreneurs for some reason turn out to be the opposite

recession

How does reducing taxes effect the economy?

reducing taxes takes less money away from people giving them more money to spend and increasing GDP

What would be an advantage of returning to the gold standard?

remove the temptation to just print more money - no hyperinflation - out of government hands; remove the need for the federal reserve

How does the government finance a deficit?

sells bonds

What is M1?

sum of currency in circulation, demand deposits, other checkable deposits, and traveler's checks (currency and checkable deposits)

When people have a higher rate of time preference, how does the supply curve shift and how does this effect interest rates?

supply curve moves left and interest rates increase; less investment so more production of present consumption goods

What is monetary policy?

the attempt by the nation's central bank to manipulate the over-all money supply

What causes all the errors to happen at the same time causing a recession?

the federal government changes monetary policy and distorts the signals

What is Fiscal policy?

the manipulation of the federal government's budget in order to bring about desired levels of total spending in the overall economy - tax policy

What does interest on a loan represent?

the opportunity cost for borrowing

What is an interest rate?

the price of obtaining something now that you would otherwise have to wait for - you take out a loan because you want something now but you will have to pay extra for it

What is M2?

the sum of M1 plus noncheckable deposits (savings accounts plus M1)

What happens to supply curve of loans and interest with a lower rate of time preference?

the supply curve shifts right and interest rates fall more investment and more production of future consumption goods

Why do some people want to return to a monetary cold standard?

they don't trust the government to run the monetary system - think it needs actual backing

Why has the US had mostly deficits?

they have convinced themselves that there is no need for a balanced budget because it will even out late

How does money reduce transaction costs?

we don't have to spend time and money trying to find a buyer or seller; money is used in all markets and has a set value; cost of something can be adjusted in small amounts

What is a low rate of time preference?

we place a greater value on consumption later rather than today

What is the symbol for federal spending?

(G)

central bank of the US created by congress

Federal Reserve System

When currency could be exchanged for gold at some fixed ratio

Gold Standard

Where does Federal Revenue come from? What is the symbol for it?

Taxes (T)