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)