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Elements of Econ Final Study Set
set for final: monetary + fiscal policy
71
Economics
Undergraduate 3
12/11/2012

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Term
Monetary Policy
Definition
the adjustment of the quantity of money in circulation to acheive specific enonomic goals
Term
Federal Reserve System
Definition
America's decentralized central banking system managed by the Federal Reserve (1913)
Term
Primary Elements of the Fed System
Definition

-Regional Fed Reserve Banks

-Board of Governors

-Federal Open Market Committee

Term
Functions of Fed Reserve
Definition

-hold bank reserves

-collects checks

-supervises operations of members banks

-regulates money supply to the needs of the economy

Term
Goals of the Fed
Definition

-supervise banking system

-use monetary policy to assist economy in achieving full-employment level of output

-alter size of money supply

Term
Federal Reserve Policy Tools
Definition

-open market operations

-reserve ratio

-discount rate

Term
open market operations
Definition
the purchase or sale of government securities by the Fed System on the open market
Term
Required Reserve Ratio
Definition
- the Fed determines a required ratio for each typer of deposit- the percentage of reserves reuqired for banks to back up their customer deposits
Term
Discount Rate
Definition
the interest rate at which the Federal Reserve stans ready to lend reserves to commercial banks
Term
Easy Money
Definition
when Fed tries to increase money supply by expanding excess reserves to stimulate economy during recession
Term
Tight Money
Definition
Fed attempts to decrease the money supply by decreasing excess reserves to slow spending during inflation
Term
Effectiveness of Monetary Policy
Definition

-speedier than fiscal policy

-less political

-cyclical assymetry

Term
Money
Definition
a commodity widely used and freely accepted in exchange for goods and services
Term
liquidity
Definition
ease with which an asset can be converted into the medium of exchange with littlel oss of value
Term
Transaction Demand for Money (D1)
Definition
amount of money people wasnt to hold as a medium of exchange
Term
Functions of Money
Definition

-medium of exchange

-unit of account

-store of value

Term
Commodity Money
Definition
has intrinsic value
Term
Flat Money
Definition
currency that is money because the government says its money
Term
Demand Deposits
Definition
(checkable deposits) money payable on demand
Term
Savings Accounts
Definition
(time deposits) money stored for a period of time and not readily available
Term
M1
Definition
consists of currency and traveler's checks plus checking deposits
Term
M2
Definition
consits of M1 plus non-checkable deposits, money market deposit accounts, small time deposits, abd money market mutual funds
Term
Credit Cards
Definition
not money but a way of obtaining money as a loan
Term
Puchasing Power
Definition
real value of money is what it can buy
Term
Velocity of Money
Definition
number of times money spent in a particular year
Term
Types of Financial Insitutions
Definition

-commerical banks

-savings and loan associations

-savings banks and credit unions

-money market mutual funds

Term
Commercial Banks
Definition
a firm, licensed b a state agency or etc., to receive deposits and make loans
Term
Thrift Institutions
Definition

-savings and loan association

-savings banks

-credit unions

Term
Savings and Loan Associations
Definition
a financial intermediary that receives checking deposits and savings deposits and that makes person, commercial, and home-purchase loans
Term
Savings Banks
Definition
a financial intermediary owned by its depositors that acceots deposits and makes mostly home-purchase loans
Term
Credit Unions
Definition
a financial intermediary owned by its depositors that accepts savings deposits and makes mostly consumer loans
Term
Money Market Mutual Fund
Definition
a financial institution that obtains funds by selling shares and uses these funds to buy highly liquid assets such as U.S. Treasury bills
Term
Services Provided by Financial Institutions
Definition

-create liquidity

-minimize cost of obtaining funds

-minimizing cost of monitoring borrowers

-pooling risk

Term
Deposit Insurance
Definition
the deposits of most financial intermediaries are insured by the Federal Deposit Insurance Corporation (F.D.I.C.)
Term
Bank Divides Funds into 2 Parts
Definition

-Reserves

-Loans

Term
Fractional Banking System
Definition

(modern banking system)

only a portion of deposits backed by reserves

Term
How do banks create more money?
Definition

-Reserves

-Creating deposits by making loans

Term
Reserve Ratio
Definition
fraction of a bank's total deposits that are held in reserves
Term
Reserve Requirement
Definition
the ratio of reserves to deposits that banks are required
Term
Excess Reserves
Definition
actual reserves minus required reserves (used to make loans)
Term
Sub Prime Mortgages
Definition
loans provided to borrowers who have a heightened perceived risk of default
Term
Sub Prime Lenders
Definition
because of greater riskm lenders offset that by higher interest rate and credit enhancements
Term
Sup Prime Loan Advantages
Definition

-offer opportunity to borrowers with less than ideal credit record to become homeowners

-lower interest rate were available

-large capital inflor to US from foreign investors

-surplus of loanable funds created

Term
Fiscal Policy
Definition
use of federal budget to acheive macroeconomic objectives
Term
Macroeconomic Objectives
Definition

-full employment

-sustained economic growth

-price level stability

Term
Automatic Fiscal Policy
Definition
a change in fiscal policy that is triggered by the state of the economy
Term
Discretionary Fiscal Policy
Definition
a policy action that is initiated by an act of Congress
Term
Countercyclical Financing
Definition
in theory creating deficts during recession and surplueses during inflation
Term
Revenue Sources
Definition

-personal income taxes

-social insurance taces

-corporate income taxes

-indirect taxes

Term
Purpose of federal budget
Definition

-stabilize economy

-finance activities of the federal government

Term
Fiscal Policy Expenditures
Definition

-transfer payments

-purchases of goods and services

-interest payments on national debt

Term
entitlement spending
Definition
government programs that entitle qualifies people to receive benefits in form of transfer payments depending on economic state
Term
Complications of Countercyclical Policy
Definition

-Timing

-Politics

-Crowding Out Effect

Term
Recognition lag
Definition
the time between when an actual economic shock occurs and when it is recognized by economists, bankers, and the government
Term
administrative lag
Definition
time elapsed between the recognition of a problem and the action taken to handle it
Term
operational lag
Definition
period between when the policy is implemented, and the point where it starts to take off
Term
crowding out effect
Definition
the government borrowing to finance the deficit, pushing out private practices
Term
Built-in Stabilizers
Definition
change in government expenditures or tazes which occurs automatically as a result of existing laws
Term
Federal Budget
Definition
the annual statement of the federal government's expenditures and tax revenues
Term
Budget Surplus
Definition
if tax revenues exceed expenditures
Term
Budget Deficit
Definition
if expenditures receive tax revenues
Term
Balance Budget
Definition
if tax revenues equal expenditures
Term
aggregate supply
Definition
total supply of all products in macroeconomy
Term
Causes for change in aggregate supply
Definition

-technological growth

-sharp change in the conditions of production

Term
Aggregate Demand
Definition
total demand for products across the entire economy
Term
Say's Law
Definition
supply creates its own demand
Term
Keynes's Law
Definition
demand creates its own supply
Term
Expansionary Macroeconomic Policy
Definition
a policy of increasing aggregate demand or buying power in an economy
Term
Contractionary Policies
Definition
policies used to reduce aggregate demand
Term
Who conducts fiscal policy?
Definition
the Treasury
Term
What quasi part of the government controls monetary policy?
Definition
the Fed
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