I.O.U.S.A. - Study Guide
What areas do they look at to determine a person's credit score
1. Payment History (do you pay your bills and do you pay them on time) 2. Debt Burden (basically how much debt do you have) 3. Length of credit history (how long have you been borrowing money) 4. Types of credit used (credit cards, car loans, home loans, etc) 5. Recent searches for credit (have you been applying for loans and credit cards...this can possibly hurt your credit score)
How many Federal Reserve banks are in the U.S.A
12
In what year was the Federal Reserve System created?
1913
In what decade did the video state that America became addicted to debt?
1980s. Said it was strange because it was a relative time of peace for the US as wars were one of the primary causes of debt.
If you borrow 100 dollars and are charged 5 percent interest. The interest is compounded quarterly. Using what you know about compound interest how much would you owe after 20 years.
270.15
What was the 2022 total Federal Revenue?
4.1 Trillion
What was the 2022 total Federal Budget?
6 Trillion
Define Frictional Unemployment and give an example
A person is in between jobs. College graduate quits his job as a waiter to search for a job that uses his degree
Part of the 2009 economic recession was caused by a total collapse in the housing market. Explain what a variable rate mortgage is.
A variable rate mortgage is a home loan in which the interest rate isn't fixed. If your interest rate is low your monthly payment will be less....what happens if that interest rate goes up? Your monthly payment will also increase and you may not be able to afford your house anymore. Also make sure to know what foreclosure is for test purposes
Explain a proportional tax and give an example
Also know as a flat tax. Everybody gets charged the same percentage. Example is sales tax. Everybody gets charged 7 percent
What is the formula for compound interest?
Amount= P (1 + r/n)^nt
What is the difference between a budget deficit and the national debt?
Budget deficits are annual. If you add all annual deficits together over years you get national debt
What is the formula for GDP
C + I + G+ (X-M)
What does a cost of living adjustment mean?
COLA, it is when you get an increase in pay because your employer/or social security check is trying to offset inflation. Basically you need a pay increase because your money is worth less than what it was before due to inflation
What President signed several balanced budgets according to the video?
Clinton in the 90s
Name the current or any past Chair of the Fed.
Current is Jerome Powell before him was Janet Yellen
Same scenario as question number 40 just now explain what you might do from a fiscal policy point of view?
Cut Spending and raise taxes
What does the video state that President George W. Bush had done three times by 2003?
Cut taxes while increasing federal spending on the Wars in Iraq and Afghanistan
What is the difference between a recession and a depression
Depression typically last for years and has higher rates of unemployment and steeper declines in GDP. A recession is defined as GDP decrease for at least 6 months
explain what a trade surplus is?
Exporting more than importing
What is the FICA tax?
Federal Insurance Contributions Act. These are the taxes taken out of paycheck that go toward funding social security and medicare
What does the G stand for
Governement spending
How does an embargo restrict trade
Government doesn't allow trade with another country
What is fiscal policy?
Government's policy on taxation and spending
What is the goal of loose monetary policy in the short term?
Grow GDP and try to maximize employment
How does a subsidy restrict trade
If the government is paying a US company money to try and help it be successful then that company is getting an advantage that other companies may not be getting
What is the difference between fixed and variable rate mortgages
If you take out a home loan and the interest rate is 5 percent and it stays 5 percent for the entire length of the loan then it is a fixed rate. If you have a loan and the interest rate can change, say from 5 percent to 7 percent, then it is a variable rate mortgage. Variable rate mortgages are riskier
explain what a trade deficit is?
Importing more than exporting
What does the M stand for
Imports
What does liquidity mean in economics?
In simplest terms how fast you can turn an asset into cash. Cash is liquid. Your house isn't as liquid as cash because it would take longer to sell it.
What is a possible effect of loose monetary policy in the long term?
Inflation
What is the definition of compound interest?
Interest being paid on interest. Example....year 1 you invest 1000 dollars and it earns 10 percent interest which is 100 dollars. So in year 2 you how have 1010 dollars invested. If you make 10 percent again in year two you would have made 11 dollars in interest. Where did that extra dollar in interest come from between year 1 and 2 (10 dollars year 1 and 11 in year 2)? It was because you made interest on your interest which is compound interest
Explain what a comparative advantage is
It is the reason that countries trade. Even though America can make more chocolate bars than Brazil that doesn't mean that it should. America would have to import the chocolate beans. With America having to focus so much to try and beat Brazil in chocolate production it would cost America to make the things that they naturally are better at (better means use of less resources). So if Brazil can make chocolate bars with less effort/resources used than America, America should let them make chocolate bars and America make something they can do better. Two countries can then trade.
What is the dual mandate of the Federal Reserve?
Keep inflation low and employment high. In other words grow GDP and keep inflation low
Explain how the New Deal implemented Keynesian economics.
Keynesian economics called for active fiscal policy during recessions and depressions. In times of hardship the government may need to spend more money even if that creates debt. The spending may be needed to stimulate the economy. The New Deal programs in America during the years following the Great Depression are an example of the Keynesian school of thought
Would loose or tight monetary policy make it easier to borrow money?
Loose
Explain what you would do from a monetary policy standpoint if the economy was showing little or no growth
Loose monetary policy. the Fed would lower the discount rate, lower reserve requirements, and buy bonds. This is a little dated info. The recession of 2008/9 changed the way the Federal Reserve operates. The new tools of the Federal Reserve are Interest on Reserve Balances (IORB) and Repos. Those are discussed in the answer to question 73
What does disposable income mean?
Money that is left after all expenses have been paid. People can choose to do whatever they want to do with this income. I would recommend trying to save and/or invest it.
Name two Free Trade agreements
NAFTA, ASEAN
Name 3 of the budget items that were listed as "everything else" in 2008.
NASA, National Parks, Education, Transportation
Who was the President that went to China to better diplomatic relations in the 1970s?
Nixon
What is stagflation?
One of the stranger things in economics. It is sometimes called recession inflation. Basically the economy is showing little or no economic growth (aka GDP) and at the same time high inflation. It is strange because typically if there is inflation the economy does experience growth because of the abundance of money in the economy
In regards to the 3 tools of the Federal Reserve, what is Open Market Policies
Open market operations is when the Federal Reserve buys or sells stocks and bonds in the stock market just like you can do. Usually it is US Treasury bonds that they are buying and selling. Remember this, if they are buying bonds it makes the supply of money in the economy bigger........if they sell those bonds it is making the money supply lower
What is tight monetary policy?
Opposite of loose
Define Structural Unemployment and give an example
Person doesn't have the skills needed anymore so he loses his job. Example would be if a person is replaced by some type of technology
What was the 1970s known for economically speaking?
Recession, Stagflation
How does the U.S.A borrow money?
Selling Bonds
What is a possible effect of tight monetary policy in the long term?
Slowed GDP growth and increased unemployment
Be very specific and explain Social Security.
Social Security is government assisted retirement. People may opt to start taking social security in their 60s. It was also part of the New Deal programs. FICA taxes do help fund social security so it isn't like a person retiring is getting "free money", at least not to begin with. Eventually though a person can outlive the amount of money they contributed to social security and then they do start receiving money they never contributed. The FICA taxes taken out of your paycheck aren't stored in an account for you. The money you contribute while working is used to pay the social security for those already retired.
referring to question 38 (explain what you would do from a monetary policy standpoint if the economy was showing little or no growth) what would you do from a fiscal policy point of view?
Spend more and lower taxes
What would have to take place in order to balance a budget fiscally speaking?
Spend the exact amount of money brought in through taxation
What is a budget surplus?
Spending less than what is brought in through taxation
What is a budget deficit?
Spending more than what is brought in through taxation
Explain why some people view FREE TRADE as a bad thing
Take the NAFTA for example. Some people say that it only benefits the developing nation (in that case critics argue it only helps Mexico). Without a tariff Mexico can produce products for cheaper so the Canadian products and the American products can't compete
How does a tariff restrict trade
Tax on an imported good. Attempts to make the American product be cheaper or at least more competitive than it would be without taxing the import
Explain how economists use the Consumer Price Index
The CPI is used to measure how much inflation has occurred between years
Explain what a social security annual deficit means.
The amount of money being taken out in FICA taxes each year is not enough money each year to fund the social security benefits of those receiving them. This adds to debt.
In regards to the 3 tools of the Federal Reserve, what is a discount rate
The interest rate that the federal reserve charges banks if they need a loan
In regards to the 3 tools of the Federal Reserve, what is a reserve requirement
The reserve requirement is the amount of money that your bank has to keep on deposit in case people come back and need their money. Remember banks like to loan out the majority of the money you deposit with them in order to make money. That is called Fractional Reserve banking.
Define Cyclical Unemployment and give an example
This is the bad kind of unemployment. People are losing their jobs because of recession or depression
What is the federal Funds rate?
This is the interest rate that banks charge one another. If your bank runs low on money and needs to borrow money they can borrow it from another bank or they can borrow it from the Federal Reserve. The FFR rate is less than the Federal Reserves interest rate (federal reserve's interest rate they charge is called the discount rate); therefore, banks will typically borrow money from one another and not the federal reserve
What is a prime rate
This is your goal....this is the interest rate that commercial banks charge their most trustworthy borrowers. Often they don't give that rate to individuals but to large corporations. Obviously you want to get at close to the prime rate as you can. How do you do this? Have great credit score!
Explain what you would do from a monetary policy if inflation was rising?
Tight monetary policy. Raise discount rate, raise reserve requirements and sell bonds. See answer to 38 about how the 2008/9 recession changed the way the Fed operates
What is loose monetary policy?
When the Federal Reserve is attempting to put more money into the economy. They have a few ways they can do this. Those ways are 1. Discount Rate, 2. Federal Funds Rate, 3. Open Market Operations, 4. Interest on Reserve Balances (IORB), 5. Repurchase Agreements. That is a lot of info. Just know loose is trying to put more money in the economy.
What is a tariff?
a tax on imports or exports
What does the C stand for
consumer spending
Why is it important to have a good credit score
determines if you can get loans and also determines the amount of interest rate you get charged if you are approved for loans.
What does the X stand for
exports
What is the goal of tight monetary policy in the short term?
fight inflation
Define Inflation
general rise in prices
Be very specific and explain how the video says that China could conduct economic warfare on the U.S.A.
if China liquidated all US bonds at once or in a short period of time America wouldn't have the money to pay them back. Remember if America misses a payment the value of the US dollar will fall drastically.
What does the I stand for
investment
In the 2008 Federal budget what were the 3 highest budgeted items?
is Social Security, Medicare, Medicaid. A lot of economists say if you are ever going to do anything to fix the debt crisis cuts will have to be made to one or all of those programs.
Explain Medicaid
is a program in which the government helps pay for some of the cost of health care for people with limited income
Explain Medicare
is a program in which the government helps pay for some of the cost of health care plans for those 65 and older and those with disabilities regardless of age. Funding comes from FICA taxes
Explain Reaganomics or Trickle Down economics.
it states that tax cuts for the wealthy will allow them to have more money to spend (they aren't having to give it to the government). That extra money they have to spend could trickle down all the way through the economy and help even those in the lower economic classes. It was thought that even with the tax cuts that "trickle down effect" would make up for the loss of tax revenue. Seen by many economist as a failed policy because debt greatly increased
How does a quota restrict trade
limits the amount of stuff that can be imported from another country. Example a store could import apples from another country but only so many
Explain a progressive tax and give an example
tax that gets higher the more income that is earned. Example is America's income tax. Remember the tax brackets that I have shown you on the board
From whom did the U.S.A borrow money from in order to pay off WWII debt?
the movie said American's were the ones that purchased the bonds (aka lending money to the US Government). Now a lot of our debt is owned by other countries. The video says that is dangerous because the US Government may need to keep in mind what those countries would like to see America do when making decisions (instead of just making the decision that is best for America)
How do standards restrict trade
this is like America saying it is okay to import products but they must meet the safety standards set by the government. Example, products imported can't contain lead
What causes inflation?
to much money in the economy. the more money in the economy the less the money is worth. also can be caused by supply issues. If there isn't enough supply available then the prices of the current inventory will increase.
Explain what an absolute advantage is
when a country can make more of a product than another country. Example: If America focused on chocolate production based on the size of our country and the amount of infrastructure I think America could produce more chocolate bars than Brazil