Economics Test 1

Monetary Policy

Monetary Policy

a set of actions taken by the Federal Reserve to control the nation's overall money supply and help moderate the effects of expansion and contradiction in the economy.

open market operations, adjusting the discount rate, and adjusting the reserve requirement

3 main tools for monetary policy

the purchasing and selling of government securities

What are open market operations?

changing the interest rate on loans the Fed makes to financial institutions to influence their own interest rates

What is adjusting the discount rate?

changing the required reserved ration that banks must keep on reserve and not use to make loans, taking money out of circulation

What is adjusting the reserve requirement?

slow down

Does offering government bonds slow down or speed up the economy?

fiscal policy

the use of government spending and taxation to influence the economy.

expansionary policy

involves increased government spending and reduced taxes to help increase economic growth.

contractionary policy

involve decreased government spending and increased taxes to slow economic growth.

most of government spending is fixed, it is difficult to predict how something will affect the economy, most actions don’t create immediate results, and coordinating many policies can be difficult.

What are some challenges to fiscal policy?

Economics

the study of choices that people make to satisfy their needs and wants

economist

someone who studies the economy

microeconomics

the study of decisions made by individual economic actors such as households, companies, and individual markets

macroeconomics

the study of the behavior of entire economies, such as entire countries.

positive economics

used to answer questions about the way the economy works, and usually relies on facts

normative economics

says how the economy should work and relies on what people think might happen

producer

people who make things to satisfy the wants and needs of the consumer

consumer

someone who buys the products

resource

anything that people use to make or obtain what they need or want

Natural resources, human resources, capital resources, and entrepreneurship

4 factors of productions

things provided by nature to produce a good

What are natural resources?

all the human labor used to create a product

What are human resources?

the manufactured materials or machinery used to make a product

What are capital resources?

the combination of organizational abilities and risk taking involved in starting a new business or introducing a new product.

what is entrepreneurship?

Scarcity

the basic problem that causes the studying of the decisions individuals make. It is a result of people’s virtually unlimited needs and wants combined with limited resources.

Due to scarcity societies and individuals are forced to make careful choices on how they use their resources.

Why is scarcity important in economics?

What to produce, How to produce, and For whom to produce

What are the 3 basic economic questions?

models

any simplified version of reality that is used to better understand a real life situation

that all other relevant factors remain unchanged

What assumption is made with models?

ceteris paribus

we assume that all other relevant factors remain unchanged

it keeps multiple independent variables from changing the dependent variable without knowing which one made the change.

what is ceteris paribus’s importance in making models?

productivity

the level of output that results from a given level of input

efficiency

the use of the smallest amount of resources to produce the greatest amount of output

trade off

when one good is sacrificed for another

opportunity cost

cost of a trade off, or the value of the next best alternative

a graph that shows all of the possible combinations of 2 goods or services that can be produced within a stated time period

what is a production possibilities curve?

the amount of available resources and technology will not change during the period being studied and that all natural, human and capital resources are being used in the most efficient manner possible.

what are the two assumptions made for a PPC

Changes occurring with technology or with the factors of production could cause a shift in the PPC.

what will cause a shift in a PPC

If there are improvements to technologies or new resources become available

what would cause a PPC to shift to the right?

If the technologies falter or if resources become unavailable

What would cause a PPC to shift to the left?

Traditional economies

Economic activities are based on the collection of rituals, habits, laws, and religious beliefs developed by the group’s ancestors.

Haiti

Example of traditional economy

Command Economy

Relies on government officials or the central government to answer the three basic economic questions. Government has control over who makes what products.

North Korea

Example of a command economy

Market economy

Individuals answer the 3 basic economic questions, not the government.

Australia

example of a market economy

traditional, command, and market

Types of pure economic systems

public private control, total government control, partial state control

Types of mixed economies

public private control

Where there is a joint venture between state and private entities.

United States

example of public private control

Total government control

the state directly influences the functioning of the entities.

China

example of total government control

partial state control

The factors of production are owned by private entities, but there is government regulation.

free enterprise

a system under which business can be conducted freely with little government intervention

being able to win private property and enter in contracts, make individual choices, engage in economic competitions, make decisions based on self-interest, and participate in the economy with limited government involvement and regulation.

five main features of free enterprise

producers, consumers, and government

3 main economic actors in the US

provide goods and services in the market

producers role in US economy

influence production by purchasing goods and services.

consumers role in US economy

oversee and regulate the effects of the 3 basic questions on the economy as a whole.

government role in US economy