Econ Test 3

Buying Securities

The Federal Bank will indirectly purchase these bonds from commercial banks or the public. In both cases, the reserves of the commercial banks will increase. When the Fed buys government bonds from commercial banks, those banks will send some of their holdings of securities to the Federal Reserve Bank. In paying for the securities, the Federal Bank in essence writes checks for $100 million to the commercial banks. Those banks will then deposit the $100 million of checks in their own accounts. When the checks clear against the Federal Reserve Bank, $100 million of reserves flow into the commercial banks. Because there are no new checkable deposits, the entire $100 million of new reserves in the banking system are excess reserves. - Excess reserves will allow the banks to make loans by a multiple of excess reserves. Suppose the reserve rate is 20, therefore the multiplier is 5. The commercial banks can expand the $100 million of excess reserves to $500 million of new checkable deposit money. When the Fed buys securities from the general public, they issue the $100 million to the sellers, who then deposit the checks into their checkable deposit accounts at their commercial banks. When the checks clear, $100 million of reserves flows into the commercial banks in which 20% is kept as excess reserves. They then lend out the excess reserves made (5 x 80 million) added to the original $100 million. This adds $500 million of new money into the economy.

Economic Impact on Tariffs

- Direct effects o Decline in consumption o Increase in domestic production o Decline in imports o Tariff revenue o Foreign producers lose revenues or sales - Indirect effects o Spillover effects to other domestic industries

Three Arguments for Protection

- Increased domestic employment. - Cheap foreign labor. - Protection against dumping (practice where some foreign firms sell their products below cost.) - Infant industry argument: protect certain infant industries that are just starting up.

Net Costs of Tariffs

- Price of imported products goes up. - Consumers shift purchases to higher priced domestic goods. - Domestically produced goods become more expensive as import competition declines.

Trade Facts

- US trade deficit in goods (imports > exports) $738 billion in 2011. - US trade surplus in services (exports > imports) $178 billion in 2011. - Overall, US has trade deficit or negative exports and has been running one for 3 decades. Trade deficit goods with China $290 billion in 2011. - Canada is the US's largest trade partner.

Determinants of Exchange Rates

- tastes - relative income - relative inflation rate changes - relative interest rates - changes in relative expected returns on stock, real estate, and production facilities - speculation

12 Federal Banks

12 banks chartered by the US government to control the money supply and perform other functions. They serve as a central bank or "banks for other bankers." The federal banks are quasi banks, meaning they blend private ownership and public control. Each fed res bank is owned by the commercial banks in its district. But the board of governors are not motivated by profit and the federal banks do not compete with commercial banks. Federal banks also issue currency.

North American Free Trade Agreement NAFTA

A 1993 agreement establishing, over a 15 year period, a free trade zone composed of Canada, Mexico and the US.

Troubled Asset Relief Program TARP

A 2008 federal government program that authorized the US Treasury to loan up to $700 billion to critical financial institutions and other US firms that were in extreme financial trouble therefore at high risk of failure.

Board of Governors

A 7 member group that supervises and controls the money and banking system of the US. The president appoints the 7 members with the confirmation of the Senate. Their terms are 14 years, and staggered so each member is replaced every two years. There is a chairperson and a vice chairperson elected to serve 4 year terms, and can be reappointed by the president.

Trade Adjustment Assistance Act

A US law passes in 2002 that provides cash assistance, education and training benefits, health care subsidies, and wage subsidies to workers displaced by imports or plant relocated abroad. - Designed to help individuals hurt by international; trade. - Offshoring jobs. - Shifting of work previously done by American workers to workers abroad.

Fractional Reserve System

A banking system that requires banks and thrifts to hold less than 100% of their checkable deposit liabilities as reserves. Only a fraction of the total money supply is held in reserve as currency. The first banks started as goldsmiths who stored consumer's gold and gave them a receipt. People started to pay other people with their goldsmith receipts. Goldsmiths began to realize that the amount of gold being deposited with them in any week was likely to exceed the amount that was being withdrawn. Goldsmiths began to loan out gold by issuing receipts. Banks can create money through lending and interest rates.

Monetary Policy

A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price level stability, full employment and economic growth. Monetary policy is quick and flexible. It is independent therefore isolated from political pressures.

Federal Reserve System

A central component of the US banking system, consisting of the Board of Governors of the Federal Reserve and 12 regional Federal Reserve Banks. The fed's major goal is to control the money supply and insuring stability of the banks. The Fed is the single largest holder of government securities.

Change In Nominal GDP

A change in the nominal GDP will shift the total money demand curve. Specifically, an increase in nominal GDP means that the public wants to hold a larger amount of money for transactions, and that extra demand will shift the total money demand curve to the right. In contrast, a decline in nominal GDP will shift the total money demand curve to the left.

Depreciation

A decrease in the value of a currency relative to another currency. It means that more units are needed to buy a single unit of some other currency.

The Multiplier Effect

A multiplier is the ratio of a change in GDP to an initial change in spending. This will measure how much larger the final change in GDP will be. multiplier = change in real GDP / initial change in spending

Aggregate Demand

A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels. Aggregate demand has a inverse relationship - spend less at higher price levels

Aggregate Supplies

A schedule or curve that shows the total quantity of goods and services supplied (produced) at different price levels. This shows the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce.

Balance Sheet

A statement of the assets, liabilities and net worth of a firm, individual or institution at some time. The sheet must balance, meaning that the assets must equal the amount of claims against those assets. Assets = Liabilities + Net Worth Liabilities - the claims on non-owners of the bank against the firm's assets. Net Worth - the claims of the owners of the firm against the firm's assets.

Value of Money

Acceptability - currency and checkable deposits are money because they are accepted as money. People are confident that it will be able to be used as a medium of exchange Legal Tender - a legal designation of a nation's official currency. Relative Scarcity - the value of money depends on supply and demand, therefore money derives its value from its scarcity relative to its utility.

Excess Reserves

Actual bank or thrift reserves minus any legally required reserves. Actual Reserves - Required Reserves

Non Tariff Barriers NTBs

All impediments other than protective tariffs that nations establish to impede imports, including import quotas, licensing requirements to restrict imports.

Short Run

An aggregate supply curve relevant to a time period in which output prices are flexible, but input prices are sticky. The curve slopes upward because with fixed input prices changes in the price level will raise or lower real firm profits. In the short run, there is a direct positive relationship between the price level and real output. When the price level rises, real output rises.

Ratchet Effect

An analog to think about price level changes. A ratchet allows the operator to move an object in one direction but not the other. The price level, wage rates and per-unit production costs readily rise when aggregate demand increases. But the price level, wage rates and per-unit production are inflexible downward when aggregate demand declines.

European Union

An association of 27 European nations that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, reduced barriers to the free movements of capital, and created other common economic policies.

Government Spending

An increase in government purchases will shift the aggregate demand curve to the right, as long as tax collections and interest rates do not change as a result. For example, and increase in transportation projects. In contrast, a reduction in government spending, like less military equipment, which shift the curve to the left.

Appreciation

An increase in the value of a currency relative to another currency. It means that takes fewer units of it to buy a single unit of some other currency. dollar price of foreign currency increases = dollar depreciates relative to the foreign currency = foreign currency price of dollar decreases = foreign currency appreciates relative to the dollar dollar price of foreign currency decreases = dollar appreciates relative to the foreign currency = foreign currency price of dollar increases = foreign currency depreciates relative to the dollar

World Trade Organization WTO

An organization of 153 nations that oversees the provisions of the current world trade agreement, resolves disputes stemming from it and holds forums for further rounds of trade negotiations. - 153 member nations in 201 - Oversees trade agreements and rules on disputes - Equal, nondiscriminatory trade between member nations - Reduction in tariffs - Elimination of import quotas - Critics argue that it may allow nations to circumvent environmental and worker-protection

Mortgage Backed Securities

Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by lenders to borrowers to help them purchase residential property.

Long Run

The aggregate supply curve associated with a period of time in which both input and output prices are fully flexible. The curve is completely vertical, meaning that in the long run the economy will produce the full employment output level no matter what the price level is.

Immediate Short Run

The aggregate supply curve associated with a period of time in which neither input or output prices respond to changes in the level of spending or production. The curve is a horizontal line, representing the total amount of output supplied directly depends on the volume of spending that results at a specific price level. Most of the firm's costs are wages and salaries, and these are almost always fixed by labor contracts for months or year at a time. Output prices are typically fixed because firms set prices for their costumers and then agree to supply quantity is demanded at those fixed prices.

Asset Demands

The amount of money people want to hold as a store of value. People like to hold some of their financial assets as money because money is the most liquid of all financial assets; it is immediately usable for purchasing other assets when opportunities arise. There is no risk involved when holding a bond. Holding it in store also puts one at a disadvantage as the money gains on interest while in store.

Transaction Demands

The amount of money people want to hold for use as medium of exchange. Depends on the nominal GDP.

Prime Interest Rates

The benchmark interest rate that banks and thrifts use as a reference point for a wide range of loans to businesses and individuals. This rate generally parallels the Federal fund rates.

Financial Services Industry

The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses and plan for retirement.

Legal- Institutional Environment

Changes in the business operation may alter the price-unit costs of output and shift the aggregate supply curve. There are two types of changes; changes in business taxes and changes in the extent of regulation. business taxes - higher taxes such as sales, excise and payroll taxes will increase per-unit costs and reduce short run aggregate supply. An increase in such taxes paid by businesses will increase per-unit production costs and shift aggregate supply to the left. government regulation - regulation tends to increase per-unit production costs and shift the aggregate supply curve to the left.

Open Market Operations

The buying and selling of US government securities or bonds by the Fed for purposes of carrying out monetary policy. The Fed's most common instrument in influencing the money supply. The US government issued Treasury bills, Treasury notes and Treasury bonds to finance past budget deficits. Over the decades, the Fed has purchases these bonds from major financial institutions that buy and sell government and corporate securities for themselves of for their costumers. The conduit for the Fed's open market operations is the New York Federal Reserve Bank and a group of 16 or so large financial firms known as "primary dealers." These financial institutions in return buy the bonds from, and sell the bonds to, commercial banks and the general public.

Liquidity

The ease with which an asset can be converted into cash money without any loss of purchasing power. Cash is perfectly liquid, while a house is highly illiquid.

Actual Reserves

The funds that a bank or thrift have on a deposit at a Federal Reserve Bank or is holding as vault cash.

Federal Fund Rates

The interest rate banks and thrifts charge on another on overnight loans made out of their excess reserves. Banks prefer to lend these excess reserves to other banks on an overnight basis to earn interest without sacrificing long term liquidity, as well as temporarily avoiding required reserves.

Discount Rate

The interest rate the Federal Reserve Banks charge on the loans they make to commercial banks and thrifts. The Fed is often the lender of last resort, and will make short term loans to commercial banks it its district. When a commercial bank borrows, it gives the Fed a promissory note (IOU). No required reserves need to be kept against loans from the Fed, all new reserves acquired by borrowing from the Fed are excess reserves. This enhances commercial banks' ability to extend credit.

Reserve Ratio

The legally required percentage of reserves for every $1 of a bank or thrift's checkable deposits. The reserve ratio for all commercial banks is 20% RR = Commercial bank's required reserves / commercial bank's checkable deposit liabilities

Equilibrium Real Output

The level of real GDP at which the aggregate demand curve and the aggregate supply curve intersect.

Determinants of Aggregate Demand

Factors that shift the aggregate demand curve when they change. If consumers decide to buy more output at each price level, the aggregate demand will shift to the right. If they buy less, the curve will shift to the left. - change in consumer spending; consumer wealth, household borrowing, consumer expectations or personal taxes. - change in investment spending; interest rates, expected returns - change in government spending - change in net export spending; national income abroad, exchange rates

Determinants of Aggregate Supply

Factors that shift the aggregate supply curve when they change. Changes in these determinants raise or lower per-unit production costs at each price level. These changes thereby lead firms to alter the amount of output they are willing to produce at each price level. When per-unit productions costs change for other reasons than change in real output, the aggregate supply curve shifts. - change in input prices - change in productivity - change in legal-institutional environment

Money Market

The market in which the demand for and the supply of money determine the interest rate or series of interest rates in the economy. It determines the equilibrium price. The equilibrium interest rate can be thought of as the market determined price that borrowers must pay for using someone else's money over some period of time.

Money Definition M1

The most narrowly defined money supply, equal to currency plus the checkable deposits of commercial banks and thrift institutions. It is currency in the hands of nonpublic bank. Government and government agencies supply coins and paper money. Commercial banks and saving institutions provide checkable deposits. These are deposits in banks or thrifts against which checks my be written. About half of M1 is in the form of checkable deposits. M1 excludes currency held by the US Treasury, Federal Reserve banks, commercial banks and thrift institutions, as well as checkable deposits.

Monetary Multiplier

The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans. Monetary Multiplier = 1 / Reserve Ratio or M = 1 / R

Easy Money Policy

Fed actions designed to increase the money supply, lower interest rates, and expand real GDP. The point of this is to make bank loans less expensive and more available, thereby increasing aggregate demand, output and employment. They can do that by... Buy securities - by purchasing securities in the open market, the Fed can increase commercial bank reserves. When the Fed's checks for the securities are cleared against it, the commercial banks discover that they have more reserves. Lower the reserve ratio - by lowering the reserve ratio, the Fed changes required reserves into excess reserves and increases the size of the monetary multiplier. Lower the discount rate - by lowering the discount rate, the Fed may entice commercial banks to borrow more reserves from the Fed.

Tight Money Policy

Fed actions to reduce the growth of the nation's money supply, increase interest rates and restrain inflation. When excessive spending is pushing the economy into inflation, the Fed can reduce reserves of commercial banks. The objective is to tighten the supply of money in order to reduce spending and control inflation. This can be done by... Selling securities - by selling government bonds in the open market, the Federal Reserve Banks can reduce commercial bank reserves. Increase the reserve ratio - an increase in the reserve ratio will automatically strip commercial banks of the excess reserves and decrease the size of the monetary multiplier. Raise the discount rate - a boost in the discount rate will discourage commercial banks from borrowing from Federal Reserve Banks in order to build up their reserves.

Investment Banks

Firms that help corporations and governments raise money by selling stocks and bonds. They also typically offer advisory services for corporate mergers and acquisitions as well as brokerage services and advice.

Insurance Companies

Firms that offer policies through which individuals pay premiums to insure against some loss, say, disability or death.

Securities Firms

Firms that offer security advice and buy and sell stocks and bonds for clients. More generally known as stock brokerage firms.

Mutual Funds

Firms that pool deposits by costumers to purchase stocks or bonds. Costumers then indirectly own a part of a particular set of stock or bonds in companies or state governments.

Pension Funds

For-profit or nonprofit institutions that collect savings from workers throughout their working years and then buy stocks and bonds with the proceeds and make monthly retirement payments.

Exchange Rates

Foreign exchange market determines foreign exchange rates. When the dollar depreciates, against foreign currencies, it takes more dollars to buy foreign goods. So foreign goods become more expensive in dollar terms, and Americans reduce their imports. Conversely, when the dollar depreciates, other foreign currencies appreciate relative to the US dollar. Dollar depreciates increases net exports (imports go down, exports goes up) and aggregate demand increases. Dollar appreciation has the opposite effect, net exports fall (imports go up, and exports go down) and aggregate demand declines.

Money and Purchasing Power

Hyperinflation renders money unacceptable, therefore when cost of living index goes up ,the purchasing power of the dollar goes down, and vice versa. Higher prices lower the purchasing power of the dollar because more dollars are needed to make the purchase.

Aggregate Supply Time Horizons

Immediate short run - both input prices as well as output prices are fixed. Short run - input prices are fixed, but output prices can vary. Long run - inout prices as well as output prices can vary.

Financial Crisis of 2007 and 2008

In 2007 a major wave of defaults on home mortgage loan threatened the health of any financial institution that had made such loans or invested in such loans. A majority of these mortgage defaults were on subprime mortgage loans, which are high-interest rate loans to home buyers with above average credit risk. Several of the biggest subprime loaners had been banks, who had recently loaned money to investment companies that had purchased many of the mortgages from mortgage lenders. When the mortgages began to go bad, many investment funds blew up and could not repay the loans they had taken out from the banks. The banks then had to write off the loans they had made to the investment companies, but doing that meant reducing their banks' reserves and limiting their ability to generate new loans. Before the crisis happened, government regulators had mistakenly believed that an innovation known as the mortgage backed security (bonds backed by mortgage payments) had eliminated most of the bank exposure to mortgage payments. But instead of holding all of those loans as assets on their balance sheets and collecting the monthly mortgage payments, the banks and other mortgage lenders bundled thousands of them together and sold them off as bonds, therefore selling the right to collect all of the future mortgage payments. The banks lent a substantial portion of the money they received from selling the bonds to investment funds that invested in mortgage backed bonds. They also purchased large amounts of mortgage backed securities as financial investments to help meet bank capital requirements set by bank regulators. So while the banks were no longer directly exposed to major portions of the mortgage default risk, they were still indirectly exposed. When many homebuyers started to default their mortgages, the banks lost money on the mortgages they still held. The banks also lost money on the loans they had made to the investors who had purchased mortgage backed securities, and also on the mortgage backed securities the banks had purchased from investment firms.

Cost Push Inflation

Inflation caused by an increase in prices of inputs and resources such as labor and raw material. The increased price of the factors of production leads to a decreased supply of these goods. Leftward shift in aggregate supply.

Federal Reserve Independence

The objective of the Fed's independency was to protect them from political pressures so that it could effectively control the money supply and interest rates in order to maintain price-level stability. Political pressures on Congress and the executive branch may at times result in inflationary fiscal policies. If Congress and the executive branch also controlled the nation's monetary policy, citizens and lobbying groups would pressure elected officials to keep interest rates low even when high rates are necessary. The Fed's objective: - Dual mandate Price stability (2% inflation rate) Maximum and sustainable economic growth An independent monetary can take actions to increase interest rates when higher rates are needed to stem inflation. Countries with independent central banks have lower inflation rates. People disagree with the Fed's independency saying it is undemocratic, unaccountable and not transparent enough.

Moral Hazard

The possibility that individuals or institutions will change their behavior as the result of a contract or agreement.

Equilibrium Price Level

The price level at which the aggregate demand curve and the aggregate supply curve intersect.

Securitization

The process of aggregating many individual financial debts into a pool and then issuing new securities backed by the pool. The holders of the new securities are entitled to receive debt payments made on the individual financial debts in the pool.

Productivity

The second major determinant of aggregate supply. Productivity is a measure of the relationship between a nation's level of real output and the amount of resources to produce the output. productivity = total output / total inputs Productivity affects aggregate supply by reducing the per-unit production of cost input. Reduction of per-unit costs increases in productivity shift the aggregate supply curve to the right.

Total Demand for Money

The sum of the transactions demanded and asset demand for money. The downward sloping line represents the total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate.

Commercial Banks and Thrifts

There are about 6,800 commercial banks, roughly 3/4 are state banks which are chartered by individual states to operate. The other 1/4 are national banks chartered by the federal government to operate nationally. There are 8700 thrift institutions which are mainly credit unions that are regulated by agencies separate from the Board of Governors and Federal Reserve Banks.

US Exports

US provides about 8.5 percent of the world's exports, the largest is China. - oil - cars - metals - appliances - computers

Dodd Frank Act

Wall Street Reformation Act of 2010 established new government agencies such as the Financial Stability Oversight Council and Orderly Liquidation Authority, which monitors the performance of companies deemed "too big to fail" in order to prevent a widespread economic collapse. It proposed to audit the Fed's monetary policy - Government Audit Office GAO could audit the Fed's lending programs. Did not pass.

Demand Pull Inflation

When an economy is operating at its full-employment output and government increases spending to meet high demands. Price levels rise due to high aggregate demand overpowers aggregate supply. "Too much money spent chasing too few goods." Rightward shift in aggregate demand.

Selling Securities

When the Fed sells securities to commercial banks, they banks pay for those bonds by by writing checks to the Fed. When the check clear, reserves flow from the commercial bank to the Fed. If all excess reserves are already lent out, this decline in commercial bank reserves produces a multiple decline in money created through lending, that is the nation's money supply declines. This multiple decline in money will equal the decline in reserves times the monetary multiplier. Th The outcome is the same when sold to the general public.

Federal Reserve Functions

Issuing currency - the Federal Banks issue Federal Reserve Notes, which is the paper currency used in the US monetary system. Setting reserve requirements and holding reserves - the Fed sets legal reserve ratios, which are the fractions of checking account balances that banks must maintain as currency reserves. The central banks accept as deposits from the banks and thrifts any portion of their mandated reserves not held as vault cash. Lending money to financial institutions - the Fed lends money to banks and thrifts. Additionally, in times of national emergency, the Fed serves as a lender of last resort not only to banks and thrifts but also to other critical firms in the financial industry. Providing for check collection - the Fed provides the banking system with a means for collecting checks. Acting as fiscal agent - the Fed acts as the fiscal agent or the provider of financial services for the federal government. The government collects huge sums through taxation, sends equally large amounts, and sells and redeems bonds. Supervising banks - the Fed supervises the operations for banks. It makes periodic examinations to assess bank profitability, to ascertain that banks perform inn accordance with many regulations. Controlling the money supply - the major task of the Fed is to manage the nation's money supply, and thus indirectly set interest rates, according to the needs of the economy.

Big Four Banks

JP Morgan, Bank of America, Citigroup, Wells Fargo (Bank of America acquired Merril Lynch) (Chase acquired Bear Sterns) (Wells Fargo acquired Wachovia)

Limitations to Monetary Policy

Lags - monetary policy is hindered by three delays or lags; a recognition lag, an administrative lag and an operational lag. Once the Fed acts, an operational lag of 3 to 6 months affects monetary policy because that much time is needed for interest rate changes to have their full impacts on investment, aggregate demand, real GDP and the price level. Cyclical asymmetry - the potential problem of monetary policy successfully controlling inflation during the expansionary phase of the business cycle but failing to expand spending and real GDP during the recessionary phase of the cycle. Liquidity trap - a situation in a severe recession in which the Fed's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment or aggregate demand.

Money Definition M2

M2 includes M1 and near monies; financial assets that do not directly serve as a medium of exchange but readily can be converted into narrowly defined money (currency and checkable deposits). M2 is equal to M1 along with non-checkable savings accounts, time deposits of less than $100,000 and individual money market mutual fund balances. M2 Includes: - saving deposits - money market deposit account MMDA; an interest earning account consisting of short-term securities and on which a limited number of checks can be written each year. - small denominated (less than $100,000) time deposits - money market mutual funds MMMFs; an interest earning account at an investment company, which pools the funds of depositors to purchase short-term securities.

Consumer Spending

Main determinant of aggregate demand. Consumer wealth is the total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities or debt. The increase of consumer spending results in the wealth effect which shifts the aggregate demand curve to the right. As consumers tighten their belts in response to the bad news, a "reverse wealth effect" sets in. This shifts aggregate demand to the left.

Change in Input Prices

Major cause of change in aggregate supply. These resource prices can be either domestic or imported. For example, increases in salaries or wages shift the curve to the left; decrease in wages shifts the curve to the left. Resources imported from abroad add to the US aggregate supply. Added supplies of resources typically reduce per-unit production costs. A decrease in the price of imported resources increases US aggregate supply. *Exchange-rate fluctuations may alter the price of imported resources. Suppose the dollar appreciates, enabling US firms to obtain more foreign currency with each dollar. This means that domestic producers face a lower dollar price of imported resources. US firms will respond by increasing their imports of foreign resources, thereby lowering their per-unit production costs at each level of output. This will shift curve to the right.

Bonds

Make fixed payments, guaranteed, does not vary.

Functions Of Money : Store of Value

Money allows people to transfer purchasing power from the present to the future. It is an asset set aside to purchase items in the future.

What Backs the Money Supply?

Money is guaranteed by the government's ability to keep the value of money relatively stable.

Functions Of Money : Medium Of Exchange

Money is usable for buying and selling goods and services. It is an item that sellers generally accept and buyers generally use to pay.

What caused the mortgage default rates to skyrocket?

One reason being that certain government programs encouraged and subsidized home ownership for former renters. Real estate values were also declining. Most of all was when banks thought they were no longer exposed to large portions of their mortgage default risk, they became lax in their lending practices. A natural result was that many people took on too much mortgage and were soon failing to make their monthly payments.

Federal Reserve Notes

Paper bills issued by the federal reserve banks (US central bank)

Wall Street Reform and Consumer Protection Act

Passed to help prevent many of the practices that led to the crisis. It gave authority to the Federal Reserve to regulate all large financial institutions, create an oversight council to look for growing financial risk, established a process for the federal government to sell off the assets of large failing financial institutes, provide federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau with the Fed. Critics say that this act will add heavy regulatory costs while doing little to prevent future government bailouts.

Stocks

Pay dividends, not guaranteed. Varies with company profitability.

Derivative

Promise to deliver certain assets at specific price at some future date.

Thrifts

Saving a loan associations, mutual saving banks and credit unions that offer checking and saving accounts and make loans. Today, major thrifts offer the same range of services as commercial banks.

Investment Spending

Second biggest determinant of aggregate demand. Increases in investment spending at each price level boost aggregate demand, and decreases in investment spending reduce it. real interest rates - a nation's central bank can take monetary actions to increase and decrease interest rates. Interest rates are the cost of borrowing. Rise in real interest rates will raise borrowing costs, lower investment spending and reduce aggregate demand. expected returns - these are expectations about future business conditions. Higher expected returns on investment projects will increase the demand for capital goods and shift the aggregate demand curve to the right. Expected returns are influenced by future business conditions, technology, degree of excess capacity, and business taxes. Investment spending is more volatile than consumer spending.

Foreign Investors

Selling domestic assets to foreigners. The main reason it is possible we buy more stuff from foreigners than we sell to this is because we sell domestic assets to them or we borrow money from them. Foreign Investment - Foreign Direct Investment FDI - InBev purchasing Anheuser Busch - Foreign Portfolio Investment - Japanese pension fund by buying Facebook stock. US Borrowing - Public or national - US government selling debt securities to foreigners. - Private - Microsoft selling bonds to Chinese banks or taking out a loan from a French bank.

Functions Of Money : Unit of Account

Society uses monetary units as a yardstick for measuring the relative worth of a wide variety of goods. It permits us to define debt obligations, determine taxes, and calculate a nation's GDP.

Federal Open Market Committee FOMOC

The 12 member Federal Reserve group that determine the purchase and sale policies of the Federal Reserve banks in the market for US government securities. They aid the Board of Governors in conducting monetary policy. They meet around 8 times a year. - 7 members of Board of Governors - President of NY Federal Reserve Bank - 4 of the remaining presidents of Federal Reserve Banks on a 1 year rotation.

Altering the Reserve Ratio

The Fed can manipulate the reserve ratio in order to influence the ability of commercial banks to lend. Raising the ratio requires banks to reserve more money. As a consequence, either the banks lose excess reserves, diminishing their ability to create money by lending, or they find their money supply. Lowering the reserve ratio transforms required reserves into excess reserves and enhances the ability of banks to create new money by lending. It changes the amount of excess reserves in banking as well as the size of the monetary multiplier.