Econ Final

barter

trading one good or service for another without using money

double coincidence of wants

2 people each want a good or service that the other person can provide

money’s four functions in society

medium of exchange

store of value

unit of account

standard of deferred payment

medium of exchange

whatever is widely accepted as a method of payment

store of value

something that serves as a way of preserving economic value that one can spend or consume in the future

unit of account

the common way we measure market values in economy

standard of deferred payment

money must be acceptable to make purchases today that will be paid in the future

commodity money

an item used as money

commodity backed currencies

currencies with values backed up by gold or another commodity

Fiat money

no intrinsic value, but universal faith and trust that the currency has value

federal reserve bank

central bank of the US, bank regulator, responsible for monetary policy

liquidity

how fast you can turn money into stuff

federal reserve bank

bank regulator, does monetary policy

M1 money supply

narrow definition, currency, checking accounts, travelers’ checks, more liquid than M2

M2 money supply

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

payment system

helps an economy exchange goods and services for $ or other financial assets

transaction costs

cost associated with finding a lender or a borrower for this $

assets

loans, bonds, reserves

liability

$ depositied in a bank

cautions about the money multiplier

* banks might want to hold more reserves than the required amount
* in a recession, banks are likely to hold more reserves
* fed reserve may raise or lower requires reserves to change quantity of $ in economy
* make transactions harder or easier

central bank purpose

* conduct monetary policy
* ensure nation’s financial system operates smoothly
* provide banking services to gov

central bank power organization

* semi decentralized
* gov appointees and people from private sector banks
* 7 members in board of governors appointed by the president and confirmed by Senate

Chair of Fed Reserve Board

* Janet L. Yellen
* one vote, control agenda, Fed’s public voice

12 Fed Reserve Districts

12 regional fed reserve banks each responsible for supporting the commercial banks in its district

types of requirements banks must maintain

* reserve requirement
* capital requirement
* restrictions on the types of investments banks may make

bank run

depositors race to the bank to withdraw their money in fear they’d be lost

2 strategies to protect against bank runs

* deposit insurance
* lender of last resort

deposit insurance

insurance system that ensures depositors do not lose money

lender of last resort

provide long term emergency loans in financial crisis

Federal Open Market Committee (FOMC)

makes the decisions regarding open market operations

reserve requirements

% of each bank’s deposits legally required to hold

greater reserve requirement

less money available to lend out

smaller reserve requirement

more money available to lend out

discount rate

interest rate charged by the central bank on the loans it gives to other commercial banks

changing discount rate affects

INC discount rate → fewer loans available, money supply DEC, market rates INC

expansionary monetary policy

INC supply of money and loans

DEC interest

contractionary monetary policy

DEC supply of money and loans

INC interest

federal funds rate

interest rate one bank lends funds to another bank overnight

open market operation

central bank changes bank reserves to affect supply curve of loanable funds

contractionary Monetary Policy effects on AD

* reduce business investment
* reduce consumer borrowing

expansionary Monetary Policy effects on AD

* increase business investment
* increase consumer borrowing

countercyclical

moving in the opposite direction of the business cycle

* Monetary policy should be countercyclical

quantitative easing

purchase of long term securities by central banks to make credit available to stimulate AD

velocity

speed at which money circulates through economy

budget deficit

gov spending > taxes

budget surplus

gov spending < taxes

balanced budget

gov spending = taxes

deficit

* expenses exceed revenues
* liabilities exceed assets

debt

* accumulated over time
* sum of all deficits and surpluses

individual income tax

tax based on income

payroll tax

based on pay received from employees

progressive tax

tax more on rich

marginal tax rate

tax % on the last paycheck

proportional tax

flat % of income earned, regardless of income

regressive tax

higher income taxed less

corporate income tax

tax imposed on corporate profits

excise tax

tax imposed on specific good

estate/gift tax

tax on people who pass assets to the next generation either rafter death or during life

annual budget deifict

difference between tax revenue collected and spending

budget deficit

how much the gov borrowed in a year

fiscal policy

use of gov spending and tax policy to influence economy over time

expansionary fiscal policy

increase Aggregate Demand

* INC gov spending
* DEC tax

contractionary fiscal policy

decrease Aggregate Demand

* DEC gov spending
* INC tax

discretionary fiscal policy

law that explicitly changes overall tax/spending

(stimulus package)

automatic stabilizers

* slow down rate of DEC AD when economy slows down
* restrain AD when economy speeds up
* no change in legislation
* unemployment insurance, food stamps

standardized employment budget

budget deficit/surplus adjusted for what it would’ve been if the economy was at potential GDP

crowding out

gov borrowing and spending results in higher interest rates, reducing business investment, and consumption

recognition lag

time it takes to determine a recession occurred

legislative lag

time it takes to get a fiscal policy bill passed

implementation lag

time it takes for policy to be implemented

growth consensus

70% of the differences income per person is explained by differences in physical capital

East Asian Tigers

* high growth rates
* rapid export led industrialization
* converge with tech leaders of high income countries

growth policies for high income countries

* increase GDP (shift AS to the right)
* fiscal policy: investment
* monetary policy: keep inflation low
* need both long/short term focus

growth policies for middle income countries

* save $ for domestic investment to build physical and human capital
* more freedom for market forces

growth policies for low income countries

* attract foreign investment
* have political stability
* have domestic economic growth

converging economy

economy of a country that has demonstrated ability to catch up to tech leaders by investing in physical and human capital

infant industry argument

protecting new industries for a time until they become established

export led growth strategy

China, India

* dependent on foreign market
* neglect domestic priorities
* wage suppression

import substitution industrialization

Latin America, Africa

* make everything themselves
* lead to high inflation

absolute advantage

bigger number

* use fewer resources to produce a good compared to another economy
* a country more productive than another country

comparative advantage

smaller number

* country can produce a good @ lower cost in terms of other goods

theory of comparative advantage

trade should happen between economies with big differences in opportunity cost of production

intra-industry trade

international trade of goods within same industry

gains from specialization

* split up value chain
* different stage of producing a good happen in different geographic locations
* economy of scale
* enables 1 or 2 producers to supply the entire countrytarr

tariff

taxes placed on imported goods

protectionism

government block imports

import quotas

numerical limitations on the # of goods a country can import

absolute quota

limit of import

trade rate quota

limit of quantity of goods to be imported

nontariff barriers

ways a nation can make it more costly/difficult to import products

US International Trade Commission

study of barriers of trade, predicts that reducing trade barriers would not lead to loss of jobs

infant industry argument

blocks imports for limited time, give infant industry time to mature

anti-dumping argument

blocks imports sold below cost of production with tariffs that INC $ of imports to reflect their cost production

environmental protection argument

environmental assets are undervalued, tend to be overused, resulting in environmental damage

ensafe consumer argument

shut off trade for certain imports b/c unsafe for customers

national interest argument

nation shouldn’t depend too heavily on others for certain products: oil, tech

innocent explanation

supply and demand set market prices, not cost of production

sinister explanation

dumping is part of a long term strategy to drive out domestic competition, then raise prices (aka predatory pricing)

M1 money supply

currency, checking accounts, travelers’ checks

M2 money supply

everything in M1 but also adds:

savings deposits, money market funds, certificates of deposit