Money and Banks
What are the three functions of money, define each one.
Unit of account: A way in which market values are measured in an economy.
Medium of exchange: Widely accepted as a method of payment.
Store of value: Serves as a way of preserving economic value that can be spent in the future.
Explain why the money supply curve is vertical.
Because it is not influenced by interest rates it is completely controlled by the Fed.
What is the US's largest spending category currently?
Social security
List the three groups that interact with the foreign exchange market.
Tourists, firms that trade internationally, international investors.
How does free trade impact wages?
Free trade increases wages for all of the industries that export goods. Lower wages for sectors where we import goods.
Explain the difference between fiat money and commodity money.
Fiat money: A government issued currency not backed by a commodity.
Commodity money: A physical item that has value in itself and can be used to buy goods. It has value even if it's not used as money.
Give three examples of expansionary monetary policy.
Buying government securities through the open market, decreasing interest on reserve balances, decreasing the required reserve ratio, decreasing the discount rate.
Give an example of something included in mandatory spending and discretionary spending.
Mandatory spending: Social security and Medicare
Discretionary spending: Education, national defense, healthcare
What are the scenarios we discussed that would shift the foreign exchange market. (There's 5)
1. Expectations about the future
2. Tastes and preferences
3. Relative income
4. Price level
5. Interest rates
What is dumping and why is it bad?
Selling internationally traded goods below their cost of production. Allows another country to control the market for that good because of the fragile nature of their economy and not wanting to deny their citizens cheaper goods.
List everything included in M1.
Currency, checkable deposits, and traveler's checks
Explain the difference between the Board of Governors and the Board of Directors.
Board of Governors: 7 members, one person chairs, appointed by the President.
Board of Directors applies to each regional Fed banks and consists of 9 members, 6 elected by commerical banks 3 chosen by board of governors.
Give an example of a progressive tax and a proportional tax.
Progressive tax: Federal income tax
Proportional tax: Sales tax
Country A produces 18 cassette decks and 24 radios. Country B produces 16 cassette decks and 22 radios. Who should import radios?
Country A
What happens to consumer surplus and producer surplus after a quota is implemented.
Does a quota generate government revenue?
Consumer surplus decreases producer surplus increases. No government revenue is generated.
What does the monetary base consist of?
Currency in circulation and reserves.
Identify how expansionary monetary policy will impact:
Money supply, nominal interest rates, price level, real gdp, consumption, investment, aggregate demand, value of the dollar, exports, imports, and net exports.
MS: increases
nominal interest rates: decrease
price level: increases
real gdp: increases
ad: shifts to the right
dollar: depreciates
exports: increase
imports: decrease
net exports: increase
How is an excise tax different from a proportional tax?
An excise tax is a type of proportional tax except a proportional tax applies to all goods excise taxes only apply to specific goods.
Consider the foreign exchange market between the US and Brazil. If Brazil is experiencing a severe recession draw the impact of this on the foreign exchange market. What will happen to the US dollar?
US dollar will depreciate
500 produced domestically
700 imported
A bank receives a deposit of $90,000 and has $20,000 worth of bonds. They loan out $85,000 and now have zero excess reserves. What is the reserve requirement ratio for this bank?
5.6%
To correct the market the central bank decides to buy large-scale assets. Draw the impact of this on the money market and the aggregate market.
NA
What is non-discretionary fiscal policy, give an example.
It's an automatic change in government spending or tax revenue that occur based on the state of the economy without deliberate government action.
Examples: food stamps and unemployment benefits
Japan can produce 6 steel and 3 televisions South Korea can produce 8 steel and 2 televisions if the terms of trade are 1 TV for 3 steel would either country accept those terms?
Japan imports steel: 1 steel = 1/2 TV
South Korea imports TVs: 1 TV = 4 steel
Both would accept terms of trade.
In Milton Friedman's video I told everyone to watch the Friday before break what is he referencing when he discusses the visible versus the invisible.
Jobs lost in the steel industry versus jobs lost in all other sectors.