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Economics Final- Part 2

Terms in this set (30)

Describe three functions of the Fed. What role does it play in the management of the economy?
-the Fed's basic role is to control the money supply
-the Board establishes policy for the nation's banking system
-supervise member banks
-lender of last resort
-provides check clearing services
Define monetary policy. Why does the Fed use it?
-actions the Federal Reserve System takes to influence the rate of inflation and real GDP
-to lessen the effect of the natural business cycle
Three tools the Fed can use to influence the money supply. Explain how they make the money increase and/decrease.
Reserve Requirement
A regulation that requires a bank to keep a certain percentage of each dollar deposited in the bank. It must keep the money in its reserve account with the Fed or in its own vault.
Lower the reserve requirement → Money Supply Rises
Raise the Reserve requirement → Money Supply Falls
Open Market Operations
Buying and selling of government securities by the Fed.
Open Market Purchase → Money Supply Rises
Open Market Sales → Money Supply Falls
Discount Rate
The interest rate charged by the Fed to banks
Lower the Discount Rate → Money Supply Rises
Raise the Discount Rate → Money Supply Falls
What can the Fed do in times of recession? How can this affect aggregate demand?
-Increase the money supply, increasing aggregate demand
-Lower the discount rate
-Open market purchases
-Lower the reserve requirement
What can the Fed do when facing inflation? How does effect aggregate demand?
-decrease the money supply, decreasing aggregate demand
-raise the discount rate
-Open market sales
-raise the reserve requirement
What is the federal funds rate? How is it different from the discount rate?
If a bank needs to borrow funds it has two choices to borrow from another bank or to borrow from the Fed. If the bank borrows from another bank they pay interest called the federal funds rate, if they borrow money from the Fed they pay the discount rate. So if you were a bank and wanted to borrow money and the federal funds rate was lower than the discount rate you would surely borrow from another bank.
Why is it essential for the Fed to operate independent of the political process? Describe at least two ways it is insulated.
They can not be effective in managing the economy if they are worried about people getting elected.
What is GDP? Why do we study it?
GDP considered for several years, reflects the rate of economic growth
How is GDP limited in reflecting economic growth and standard of living?
It does not account for
-Negative externalities, like pollution
-Income inequality
-Household production
Why Intermediate Goods are omitted from GDP
GDP only counts final foods, a good sold to its final user, like a hamburger. If they counted intermediate goods like the bun when it is bought by the restaurant you would be double counting or counting some goods more than once
Why Illegal Goods and Services are omitted from GDP
In order for something to be part of GDP it needs to be capable of being recorded, not many criminals keep records of their transactions and then share those records with the government
Why Transactions of Legal Goods and Services for Which There are No Records are omitted from GDP
Goods or services paid with cash and there is no sales receipt. This would be the underground economy like working off the books. For example, if you were to mow your neighbors lawn or tutored someone after school.
Why Some Nonmarket Goods and Services are omitted from GDP
Goods and services that are traded in an unofficial market setting. For example your Mom does the shopping, cooking and cleaning but since she is not directly paid there is no way to measure it.
Why Sale of Used Goods is omitted from GDP
Counting an item such as a used car would cause double counting since it was already recorded in its new state.
Why Stock Transaction and Other Financial Transactions are omitted from GDP
A person who is buying stock is not buying a product but rather a share in an ownership right in a company
Why Government Transfer Payments are omitted from GDP
When the government makes a payment to someone (like an unemployment check) they generally do not get a good or service in return.
Why Goods produced outside the borders of the U.S. are omitted from GDP
The jobs and the salaries created by the production of the go to the country it is produced. (Formerly economists used to use a calculation called GNP that counted anything produced by a business owned by an American counted) For example if a U.S. citizen owns a company based in Japan it would have counted for GNP but has been excluded by GDP
Why is real GDP more accurate then nominal GDP?
GDP expressed in constant, or unchanging, prices
Why is real GDP per capita the best measurement?
-It gives the best indicator of standard of living
-It takes out the effects of inflation and population
What are net exports? Why is it used in the calculation of GDP instead of all exports?
-Import spending is expenditures made by residents of the United States on goods produced in other countries
-Export spending is expenditures made by residents of other countries on goods produced in the United States.
-Net Exports are exports minus imports
What is a business cycle?
A period of economic growth followed by economic contraction
Name the phases of the business cycle
peak
contraction
trough
recovery
expansion
Identify possible causes of swings in the business cycle.
Changes in the money supply
Political issues
Business investment and government spending
Identify and describe the four types of unemployment give an example of each?
Frictional Unemployment- workers between jobs
Structural Unemployment- workers whose industries and skills have been made obsolete by a changing economy.
Cyclical Unemployment- jobs that have been lost because of general economic factors, like a recession
Seasonal Unemployment- a worker has a job but is prevented by seasonal conditions from working
What unemployment rate? Who is included in the unemployment rate?
-Percentage of the civilian labor force that is unemployed,
-Exists officially when people in the civilian work force, 16 years and older, are willing and able to work and are actively looking for a job and cannot find one.
What is a discouraged worker?
People who want a job but have given up looking for one
What number is considered good for the economy?
4-6%
What is the inflation rate?
the percentage change in prices over time
What is a market basket and what is it used for?
-typical goods and services for an urban household
-to calculate the rate of inflation
What is the effect of inflation on purchasing power?
the same amount of money buys fewer goods and services
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