Chapter 15 & 16 Terms Test- Econ.

Government growth since World War II:

The number of government workers and functions has decreased dramatically. During the depression, more government services were needed. Financing WWII caused more government growth.

Number of regional Federal Reserve banks:

twelve.

Federal Open Market Committee (FOMC):

12 voting members meets 8 times a year to decide the course of action that the Fed should take to control the money supply. It determines such economic decisions as whether to raise or lower interest rates. It is this committee's actions that have a resounding effect throughout the financial world.

Social Security:

Federal program that provides monthly payments to people who are retired or unable to work. First began in 1935 during the Great Depression.

Federal reserve expansionary monetary policies:

Loose Money Policy or "expansionary", is monetary policy that makes credit inexpensive and abundant, possibly leading to inflation. Tight Money Policy or "contractionary", is monetary policy that makes credit expensive and in short supply in an effort to slow the economy.

Monetary Policy:

Rule that involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit, thereby affecting business activity in the economy.

Chairman of the Federal Reserve during the 1990s:

Alan Greenspan

Member Banks:

All are required to become members of the Federal Reserve System. Banks chartered by states may join if they choose to do so. To become one of these, a national or state bank buys stock in its district's Federal Reserve bank. All institutions that accept deposits from customers must keep reserves in their Fed district bank. Fed services are also available to all depository institutions, member or nonmember for a fee. Major advantage: they receive dividends on their stock in the district bank. They are also able to vote for 6 of the district bank's 9 board members.

Institutions that belong to the Federal Reserve:

All institutions that accept deposits from customers must keep reserves in their district Federal Reserve bank.

Federal Advisory Council (FAC):

Assists the Board of Governors. 12 members, elected by the directors of each Federal Reserve district bank. Meets at least 4 times each year and reports to the BoG on general business conditions in the nation.

John Maynard Keynes economic beliefs:

Believed that forces of aggregate supply and demand operated too slowly in a serious recession and that the government should step into to stimulate aggregate demand. Supports the use of government spending and taxing to help the economy.

Consumer Protection:

By law, sellers of goods and services must make some kinds of information available to people who buy on credit. This info includes the amount of interest and size of the monthly payment to be paid. The Federal Reserve System decides what type of financial info must be supplied to consumers.

Board of Governors:

Directs the operations of the Fed. It supervises the 12 Federal Reserve district banks and regulates certain activities of member banks and all other depository institutions. 7 full-time members are appointed by the President with approval of the Senate. President chooses one chairmen. Each member serves 14 years, recycles at every opening every 2 years. Members can't be reappointed.

Externalities:

Economic side effects or by-products that affect an uninvolved third party; can be negative or positive. The government can implement laws to curb the negative side effects of the production process.

Money supply:

The cost of credit is the interest that must be paid to obtain it. As the cost of credit increases, the quantity demanded decreases. If the cost of borrowing drops, the quantity of credit demanded rises. Loose Money Policy or "expansionary", is monetary policy that makes credit inexpensive and abundant, possibly leading to inflation. Tight Money Policy or "contractionary", is monetary policy that makes credit expensive and in short supply in an effort to slow the economy. A loose one is used to encourage economic growth. Tight one is to control inflation.

Federal Reserve Banks:

The nation is divided into 12 Federal Reserve districts, each has its own Fed district bank. Each of the 12 district banks is set up as a corporation owned by its member banks. A 9 person Board of Directors, made up of bankers and businesspeople, supervises each Federal Reserve district bank. The system also includes 25 Federal Reserve branch Banks. These smaller banks act as branch offices and aid the district banks in carrying out their duties.

Federal Reserve:

Was created by Congress in 1913 as the nation's central banking organization. It's major purpose was to end the periodic financial panics or recessions that had occurred during the 1800's and into the early 1900's. Made up of a Board of Governors assisted by the Federal Advisory Council, the Federal Open Market Committee, 12 Federal Reserve district banks, 25 branch banks, and about 4,000 member banks. Power is not concentrated in a single central bank but is shared by the governing board and the 12 district banks. Also responsible for monetary policy in the United States.

Responsibilities of the Federal Reserve System:

Check clearing, acting as the federal government's fiscal agent, supervising member state banks, holding reserves, supplying paper currency, and regulating the money supply. Check clearing is a method by which a check that has been deposited in one institution is transferred to the issuer's depository institution.

Recent problems measuring the money the money supply:

Keeping track of the growth of M1 and M2 becomes more difficult as money is shifted from savings accounts into interest-paying checkable accounts of from checkable accounts into money market deposit accounts. The increased use of debit cards and electronic funds transfer has also changed the way money circulates through the economy. When there was some rising inflation, the Fed increased the amount of money in circulation, thereby worsening inflation. When the economy was slowing down and going into recession, the Fed decreased the money supply, which also worsened it.

Major Taxes:

Personal Income: Tax is a percentage of income and a major source of federal revenue; many state governments also levy. Progressive at the federal level, but is sometimes proportional at the state level. Social Insurance: Taxes covered by the Federal Insurance Contributions Act (FICA), second-largest source of federal revenue. Proportional up to income of $804,400 in 2001, regressive above that (as estimated by the Social Security Administration). Corporate Income: Federal tax as a percentage of corporate profits; some states also levy. At the federal level, progressive up to $18.3 million, proportional above that. Excise: Tax paid by the consumer on the manufacture, use, and consumption of certain goods, major federal taxes are on alcohol, tobacco, and gasoline; some states also levy. Regressive if people with higher incomes spend a lower proportion of income on taxed items. Taxes paid when purchases are made on a specific good, such as gasoline. Estate: Federal tax on the property of someone who has died; some states also levy. Progressive; rate increases with the value of the estate. Inheritance: State tax paid by those who inherit property. Varies by state. Gift: Federal tax paid by the person who gives a large gift. Progressive; rate increases with the value of the gift. Sales: Tax paid on purchases; almost all states as well as many local governments levy; rate varies from state to stare and within states; items taxed also vary. Regressive if people with higher incomes spend a lower proportion of income on taxed items. Property: State and local taxation of the value of property; both real property (such as buildings and land) and personal property (such as stocks, bonds, and home furnishings) may be taxed. Proportional; rate is set by state and local governments. Customs Duties: Tax on imports; paid by the importer. Proportional.

3 different kinds of taxes:

Proportional Tax is a tax that takes the same percentage of all incomes; as income rises the amount of tax paid also rises. Progressive Tax is a tax that takes a larger percentage of higher incomes than lower incomes; justified on the basis of the ability-to-pay principle. Regressive Tax is a tax that takes a larger percentage of lower incomes than of higher incomes.

Government Programs that assist the poor:

Public Goods are goods or services that government supplies to its citizens; can be used by many individuals at the same time without reducing the benefit each person receives. Property rights include the right to own factors of production, to risk investment, and to discover new ways of production. Income Redistribution is the government activity that takes income from some people through taxes and uses it to help citizens in need. Social Insurance Programs are government programs that pay benefits to retired and disabled workers, their families and the unemployed. Worker's Compensation is a government program that extends payments for medical care to workers injured on the job. Public-Assistance Programs/welfare are government programs that make payments to citizens based on need. Supplemental Security Income is a federal program that includes food stamps and payments to the disabled and aged. Temporary Assistance for Needy Families is a state-run program that provides assistance and work opportunities to needy families. Medicaid is a state and federal public-assistance program that helps pay health care costs for low-income and disabled persons.

Reserve requirements:

Regulations set by the Fed requiring banks to keep a certain percentage of their deposits as cash in their own vaults or as deposits in their Federal Reserve district. Currently must keep 10% of their checkable deposits as reserves with the Fed. A central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves(rather than lend out).

Opposition to government assistance programs:

Say that merit goods should be provided by private organizations. If people pay fewer taxes, they have more disposable income and can choose to fund symphonies or other merit goods if they really want such services. They think that most government assistance discourages personal initiative, affects incentives and harms self-development. They say to encourage market solutions to such problems as pollution.

Single parents and Government assistance:

Temporary Assistance for Needy Families, Welfare.

Fractional Reserve Banking:

system in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend.