Econ Unit 4 Test Review

Federal Reserve

The central banking system of the United States. To provide a more stable and flexible monetary and financial system.

Inflation

Sustained (keeps going up) rise in the general (everything) level of prices.

FDIC

An independent agency created by Congress to maintain stability and public confidence in the nation’s financial system.

Reserve Requirements

The amount of funds that a bank holds in reserve to ensure that it is able to meet its liabilities in case of sudden withdrawals.

Interest

 The price paid for the use of money or credit.

Discount Rate

The interest rate used to calculate the present value of future cash flows.

Open Market Operations

A monetary policy tool used by central banks to influence the economy's money supply and interest rates.

Monetary Policy

The actions a central bank takes to influence the money supply and credit conditions in an economy.

M1

• Currency (coins/paper)

• Checking Accounts

• Travelers checks

M2

Near Money: can be easily changed into checks + currency, like savings accounts 

What typically happens to the purchasing power of money over time?

Decreases over time due to inflation

Who benefits from inflation?

• Debtors: paying back loans with less valuable money

• Owners of assets (land, home, etc.): may experience an increase in value more than the inflation rate

Who does inflation hurt?

• People on fixed incomes →retirees

• Creditors → being paid back in less valuable money

• Savers → If the inflation rate is higher than the interest they earn

What are the problems with the CPI?

• Substitution bias

• New product bias

• Quality change bias

Demand-Pull Definition

Aggregate demand is high in relation to aggregate supply

Demand-Pull Examples

Increased consumer spending and government investment boost overall demand for goods and services, exceeding what the economy can produce

Cost-Push Definition

The Cost of making and selling goods pushes prices up

Cost-Push Examples

When the price of oil, a major input for many sectors, increases, causing transportation and  manufacturing costs to rise

Structural Unemployment

Occurs when skills don’t match what employers want and need. Worst, long-term.

Cyclical Unemployment

Occurs when there is too little demand for goods and services. Second worst, long-term.

Frictional Unemployment

Occurs when people are temporarily between jobs. Not a big deal, short-term.

Seasonal Unemployment

Occurs during certain times of the year (seasonal jobs). Not a big deal, short-term.

What portions of the population make up the civilian workforce?

• People 16 or older

• People employed or seeking employment

Tight Monetary Policy

Money supply decreases (contraction) - make smaller to fix inflation

Loose Monetary Policy

Money supply increases (expansionary) - make bigger to fix unemployment

3 functions of money

1. Medium of exchange - Buy and sell items

2. Measure of value - What is something worth?

3. Store of value - Way to save

4 Characteristics of Money

1. Widely accepted

2. Durable

3. Portable

4. Divisible 

What are the functions of the Federal Reserve?

• Conducting monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates

• Promoting financial system stability

• Supervising and regulating financial institutions

• Fostering payment and settlement system safety and efficiency

• Promoting consumer protection and community development

What policy does the Federal Reserve Control?

Monetary policy

Who is the head of the Federal Reserve?

Jerome Powell

How is the Federal Reserve organized? 

It includes 3 key entities: 

• The Board of Governors

• 12 Federal Reserve Banks

• The Federal Open Market Committee

What is a run on a bank?

Occurs when many customers simultaneously try to withdraw their money from a bank due to concerns about its financial health, often triggered by rumors or news.

How does the FED protect against runs?

Acting as a lender of last resort, and through the FDIC deposit insurance.