Sexton Review

overall tariffs lead to

a smaller total quantity sold, a higher price for shoes for domestic consumers, greater sales of shoes at higher prices for domestic producers, and lower sales of foreign shoes.

reserves requirements

at any time the Fed can change the reserves ratio which determines how much of a deposit is to be reserved and to be loaned; so potent that this tool is seldom used

Under fractional reserve banking, when a bank lends to a customer,

borrowers receive a newly created demand deposit; that is, money is created.

If the Fed is concerned about underutilizing resources (e.g., unemployment), it can engage in precisely the opposite policies (increase money supply):

buy bonds, lower reserve requirements, lower the discount rate, or lower the interest rate paid on reserves. increase aggregate demand

Introducing a tariff on vitamin E would

do all... reduce imports of vitamin E., increase U.S. consumption of domestically produced vitamin E., decrease total U.S. consumption of vitamin E.

The infant-industry argument for protectionism claims that an industry must be protected in the early stages of its development so that

domestic producers can attain the economies of scale to allow them to compete in world markets.

credit unions

financial cooperatives made up of depositors with a common affiliation

savings and loan associations

financial institutions organized as cooperative associations that hold demand deposits and savings of members in the form of dividend-bearing shares and make loans, especially home mortgage loans

commercial banks

financial institutions organized to handle everyday financial transactions of businesses and households through demand deposit accounts and savings accounts and by making short-term commercial and consumer loans

open market operations

the purchase and sale of U.S. government bonds by the Federal Reserve System; implemented quickly and cheap, quietly, powerful impact several times the amount of the initial transaction, the Fed can use this tool to change the money supply by a small or large amount on any given day.

Why is it important to understand the effects of international trade?

All countries are importantly affected by international trade, although the magnitude of the international trade sector varies substantially by country. International connections mean that any of a large number of disturbances that originate elsewhere may have important consequences for the domestic economy.

Why is the money demand curve downward sloping?

At higher interest rates, and hence higher opportunity costs of holding money, the quantity of money demanded is lower. At lower interest rates, and hence lower opportunity costs of holding money, the quantity of money demanded is higher

In what way is it true that "banks make money by making money"?

Banks make money (profits) by loaning out their deposits at a higher interest rate than they pay their depositors. However, it is the extension of new loans in search of profits that creates new demand deposits, thereby increasing the stock of money.

Why do U.S. exporters, such as farmers, favor free trade more than U.S. producers of domestic products who face competition from foreign imports, such as the automobile industry?

Exporters favor free trade over restrictions on what they sell in other countries because it increases the demand and therefore the price for their products, which raises their profits. Those who must compete with importers want those imports restricted rather than freely traded because it increases the demand and therefore the price for their domestically produced products, which raises their profits.

If the world price of a good is greater than the domestic price prior to trade, why does it imply that the domestic economy has a comparative advantage in producing that good?

If the world price of a good is greater than the domestic price prior to trade, this implies that the domestic marginal opportunity cost of production is less than the world marginal opportunity cost of production. But this means that the domestic economy has a comparative advantage in that good.

Is a demand deposit an asset or a liability?

Is a demand deposit an asset or a liability?

difference between tariff and quota

So the difference between a tariff and a quota is that the tariff brings in revenue to the government while the quota benefits the foreign producer who is lucky enough to receive an import license.

Why would U.S. producers and consumers be more concerned about Canadian trade restrictions than Swedish trade restrictions?

The United States and Canada are the two largest trading partners in the world. This means that the effects of trade restrictions imposed by Canada would have a far larger effect on the United States than similar restrictions imposed by Sweden. (For certain items, however, the magnitude of our trade with Sweden is greater than it is with Canada, so for these items Swedish restrictions would be of more concern.)

True statements about trade

The importance of international trade varies greatly from place to place. The volume of international trade has increased tremendously. The composition of America's international trading partners has changed over time. International capital flows have increased over time.

discount rate

The interest rate the Fed charges on loans; change money supply by altering the rate; raise = discourages borrowing/more costly and decreases money supply; lower = cheaper, borrowing encouraged, increase money supply

Shifts in the Demand for Money

The two most important demand for money-shifters are changes in the price level and changes in RGDP. n increase in the price level and/or an increase in RGDP will cause the money demand curve to shift to the right. A decrease in the price level and/or a decrease in RGDP will cause the money demand curve to shift to the left

How do banks create money?

When a bank lends to a person, it does not typically give the borrower cash (paper and metallic currency). Rather, it gives the borrower the funds by issuing a check or by adding funds to an existing checking account. Banks make loans and create checkable deposits to make profits. By collecting higher interest payments on the loans they make than they pay their depositors for those funds

When a country has a comparative advantage in the production of a good, why do domestic producers gain more than domestic consumers lose from free international trade?

When a country has a comparative advantage in producing a good, the marginal benefit from exporting is the world price, which is greater than the forgone value domestically (along the domestic demand curve) for those units of domestic consumption "crowded out" and greater than the marginal cost of the expanded output. Therefore, there are net domestic gains to international trade (the gains to domestic producers exceed the losses to domestic consumers).

Fractional Reserve Banking System

When a new deposit enters the banking system, much of that money will be used for loans. Banks create money when they increase demand deposits through the process of creating loans.; new demand deposit splits into required reserve (10%) and excess reserves (90%), loan is made creating new demand deposit, demand deposit is spent, additional bank deposit

Reducing reserve requirements, other things being equal, would tend to

increase the dollar volume of loans made by the banking system. increase the money supply. increase aggregate demand.

What are the six primary functions of a central bank?

is a "banker's bank," where commercial banks maintain their own deposits; provides services, such as transferring funds and checks, for commercial banks; serves as the primary bank for the federal government; buys and sells foreign currencies and assists in transactions with other countries; serves as a "lender of last resort" for banking institutions in financial distress; and regulates the size of the money supply.

The Fed is institutionally independent. A major advantage of this is that monetary policy

is not subject to control by politicians.

Comparative advantage

means that nations or areas that export goods will necessarily be able to produce those goods or services more cheaply than other nations in an absolute sense.

money market

money demand and money supply determine the equilibrium nominal interest rate in the loanable funds market

Import quotas and tariffs

reduce the quantity of imports, raise the domestic price of the good, decrease the welfare of domestic consumers, increase the welfare of domestic producers., lead to deadweight loss.

The most important role of the Federal Reserve System is

regulating the supply of money

reserve requirements

reserve requirements holdings of assets at the bank or at the Federal Reserve Bank as mandated by the Fed

The Fed can do four things to reduce the money supply or reduce the rate of growth in the money supply:

sell bonds, raise reserve requirements, raise the discount rate, or increase the interest rate paid on reserves. trend: decrease in aggregate demand

Which of the following is not a function of the Federal Reserve System?

setting currency exchange rates