unit 3

A good that is widely accepted for purposes of exchange in the repayment of debt, medium of exchange, unit of account, and store of value

divisible, portable, acceptable, scarce, durable, and stable

Avoids the Coincidence of Wants (In order to trade, each party must have something that the other party wants), Firms can focus on producing one thing and getting paid with money. Then using that money to purchase the goods and services they want

A banking arrangement in which banks hold only a fraction of their deposits and lend out the remainder

created each time a loan is made and is destroyed each time a loan is repaid

banks connect savers who deposit money with borrowers who receive a loan

accept money deposits and use them to make loans

help them keep track of their assets and liabilities

something of value that you own

a debt or something you owe

value of assets - value of liabilities

a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” (left) and “Liabilities” (right)

the interest rate at which one bank lends funds to another bank overnight

the interest rate commercial banks charge their most creditworthy customers

the amount above required reserves

Anything that is generally acceptable in exchange for goods and services

A common measurement used to express value

Something with the ability to hold value over time

Central bank of the United States to ensure a stable economy for the nation

Operate a nationwide payments system and distribute the nation’s currency and coin

regulate member banks and bank holding companies and serve as a banker for the U.S. Treasury

stable price, full employment, sustainable economic growth

The changes the Fed makes to the money supply

an increase in the money supply by the fed(M2) by decreasing interest rates. Used when unemployment is rising. More money is associated with greater total spending in the economy. Increased spending in the economy leads firms to produce and sell more products. As firms sell and produce more products they hire more workers, lowering the unemployment rate. Shifts Aggregate Demand to the right

A decrease in the money supply by the fed (M2) by increasing interest rates. A smaller money supply will lower total spending in the economy. As spending decreases, firms begin to sell less.As firms sell fewer products, inventories increase (surplus of goods). To get rid of the surplus firms reduce prices, reducing inflation.

The interest rate charged by the Federal Reserves to banks that borrow on a short-term (usually overnight) basis

The amount of money banks must keep on reserve

The buying and selling of Treasury securities between the Fed and selected financial institutions in the open market, directed by the Federal Open Market Committee (FOMC), Auxiliary tool

Rate at which the Federal Reserve pay banks interest on reserve balances, which are balances held by banks at their local Federal Reserve Bank

Rate the Federal Reserve pays banks on short-term overnight deposits. Used to set a floor on interest rates. Banks buy a security from the Fed and simultaneously agree to sell it back the next day

The interest rate the Fed charges a bank for a loan. Typically set at 1 percentage point above the Federal Funds Rate.

Sell Securities, raise the discount rate, Raise the IORB

Buy Securities, lower the discount rate, Lower the IORB

borrowers

lenders

The simultaneous purchase and sale of a good in order to profit from a difference in price, ensures the federal funds rate moves up, used to borrow in the Federal Funds market and then deposit those funds at the Fed at the IORB rate and make a profit on the difference so FFR doesn’t fall too far below the IORB rate.

helped the Fed manipulate the amount of reserves the banks have available to lend - Discount Rate (tied to the Federal Funds Rate), Open Market Operations (OMO), Reserve Requirements

used by the Fed to influence consumers and businesses willingness and ability to borrow (demand) loans - Interest on Reserve Balances (IORB), Overnight Reverse Repurchase Agreement (ON RRP)

If inflation is in check, more money stimulates economic activity, thus boosting economic growth, Consumers buy cars and houses, Businesses expand, buy equipment

An effective way to fight inflation, Consumers pay more to borrow money, dampening spending, Businesses have difficulty borrowing; unemployment rises

The Federal Reserve is using the Law of Demand to influence the quantity of money demanded by changing the price (interest rates) - High interest rates (higher prices), lower quantity of money demanded - Lower interest rates (lower prices), higher quantity of money demanded

the Fed uses Expansionary Monetary policy during contractions and Contractionary Monetary Policy during expansions. Ultimate goal, help the economy stay on track with our goals - Maximum Employment, Stable Prices, and Sustainable Economic Growth

“Paradox of Thrift” – consumers and businesses save money in uncertain times. When businesses and consumers aren’t spending during an economic downturn, government should increase its spending to make up the difference, fund their spending during a recession through selling government securities (bonds), run a temporary deficit, when federal expenditures are greater than tax revenues, during a downturn and then increase taxes and lower spending during an expansionary period to balance out the government’s books

Changes government makes in spending or taxation to achieve particular economic goals

Increase in Federal spending Decrease in Federal taxes Objective is to reduce the unemployment rate

The Government increases spending and/or reduces taxes means more spending in the economy means firms are selling and producing more goods meaning they will hire more workers and then the unemployment rate falls

Shifts Aggregate Demand to the right

Decrease in Federal spending Increase in Federal taxes Objective is to reduce inflationary pressures

Government decreases spending and/or increases taxes. This leads to less overall spending in the economy, which means that firms will sell fewer goods so then firms will have a surplus and prices will go down, so inflation is reduced.

Shifts Aggregate Demand to the left

Fiscal policies that, without any new action by Congress or the President, change gov’t spending and taxes. Ex: Unemployment compensation, Progressive Income Tax

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level or overall economic activity

The time it takes policymakers to recognize a problem in the economy

The time it takes to change fiscal policy

The time between adopting new policies and the policies having an effect

Government borrowing during expansionary fiscal policy results in higher interest rates, which reduces business investment and household consumption

politicians use expansionary when they should use contractionary

trading one good or service for another, without using money

currency and checking accounts in banks, and to a lesser degree, traveler’s checks

everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

the quantity of money that the banking system can generate from each $1 of bank reserves.

an institution that provides short-term emergency loans in conditions of financial crisis

the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply

M (money supply) x V (velocity) = P (price level) x Q (real gdp)

when the federal government spends more money than it receives in taxes in a given year

when the government receives more money in taxes than it spends in a year

a tax based on the income, of all forms, received by individuals

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

the total accumulated amount the government has borrowed, over time, and not yet paid back

government spending on certain programs that are required by law

Private savings (S) + Foreign Savings (M - X)

Private sector investment (I) + Gov’t borrowing (G-T)

Private savings + Public savings + Trade deficit

Domestic investment to decrease Private savings to increase; OR Trade deficit to increase

the gap between a nation’s exports and imports (X-M)

the international flows of income and foreign aid

Less investment in physical and human capital Increase in interest rates

Large budget deficits increase demand for financial capital Drives up interest rates Private firms invest in less physical capital

total amount of money the government owes. It has been accumulating since the beginning of our nation’s history

applies the theories and methods of economics to the analysis of political behavior. Assumes that people are guided chiefly by their own self-interests Voters “vote their pocketbooks” supporting candidates and ballot propositions they think will make them personally better off Bureaucrats strive to advance their own careers Politicians seek election or reelection to office

stable price & full employment