REVIEW QUESTIONSREVIEW QUESTIONS1.) In which type of market structure does the consumer 1.) In which type of market structure does the consumer
have the have the mostmost available substitutes or choices? available substitutes or choices?a)a) monopolymonopolyb)b) oligopolyoligopolyc)c) monopolistic competitionmonopolistic competitiond)d) perfect competitionperfect competition
2.) Which of the following is a primary characteristic of a 2.) Which of the following is a primary characteristic of a capitalistcapitalist system? system?
a)a) private ownership of propertyprivate ownership of propertyb)b) governmental regulation of businessgovernmental regulation of businessc)c) equal distribution of resourcesequal distribution of resourcesd)d) graduated income taxgraduated income tax
3.) The Acme Furniture Company has issued a statement that they 3.) The Acme Furniture Company has issued a statement that they will be expanding production to include office furniture. This will be expanding production to include office furniture. This statement addresses which basic economic question?statement addresses which basic economic question?
a)a) What will be produced?What will be produced?b)b) How will items be produced?How will items be produced?c)c) For whom will items be produced?For whom will items be produced?d)d) How much will workers be paid?How much will workers be paid?
REVIEW QUESTIONSREVIEW QUESTIONSWhich of the following poses the greatest Which of the following poses the greatest
problem for unions in their attempts to gain problem for unions in their attempts to gain higher wages and better benefits for their higher wages and better benefits for their members?members?a)a)greater demand for the products they makegreater demand for the products they makeb)b)increase in number of skilled workersincrease in number of skilled workersc)c)increased union membershipincreased union membershipd)d)increasing global competitionincreasing global competition
As one of the factors of production, As one of the factors of production, capitalcapital is is defined as:defined as:a)a)the raw materials necessary to produce goods.the raw materials necessary to produce goods.b)b)the equipment and factories needed to produce the equipment and factories needed to produce
goods.goods.c)c)the supply of labor needed to produce goods.the supply of labor needed to produce goods.d)d)the goods and services produced.the goods and services produced.
Chapters 15, 16 and 17
Federal ReserveMoneyBanking
What exactly is money?
• Medium of exchange- must be recognized as something of value and be acceptable as payment for goods and services
• Unit of account- a “yard-stick” to measure prices and the value of goods
• Store of value- can be saved to be used in the future
The Ideal Money
• Durable, portable, divisible, of uniform quality, has low opportunity costs, does not fluctuate widely in value and is in limited supply
Types of Money
• Commodity money- a commodity with intrinsic value– Gold, silver, cigarettes, oil, etc.
• Fiat money- used as money because of a government decree- it does not have intrinsic value– Present coins, paper currency,
checks, credit cards
The Role of The Federal Reserve
Nation’s central bank Oversees the banking system Regulates the quantity of
money in the economy Formed in 1914, but was not
established enough to fight the Great Depression
The Structure of the Fed: Board of Governors-
– Location= Washington, DC– 7 members appointed by president– Senate confirmation is required– Chairman- directs the staff, presides
over meetings, meets with congressional committees
Ben S. Bernanke Chairman of the
Board of Governors of The Federal Reserve Bank
Regional Federal Reserve Banks- N.Y. Fed carries out the most important policies
Each district has different money
needs.
The Structure of the Fed: Federal Open Market
Committee• Main policy makers• Meets approximately every 6
weeks to review the economy• All actions to regulate the
economy by them are called “open-market operations”
The Fed’s Tool Box
Open-market operations- the Fed purchases and sells US bonds
Changing the reserve requirement- the amount of money held by a bank that can not be loaned out
Changing the discount rate- the rate of interest the Fed charges smaller banks for loans
Open-Market OperationsMonetary Policy Tool #1
Federal ReserveFederal Reserve
GOVERNMENT BONDS
SELLSSELLS
Consumers, Consumers, Banks & Banks &
BusinessesBusinesses
MONEY SUPPLY MONEY SUPPLY ==
GDP =GDP =
Open-Market OperationsA Monetary Policy Tool
Federal ReserveFederal Reserve
GOVERNMENT BONDS
BUYS BUYS (back)(back)
Consumers, Consumers, Banks & Banks &
BusinessesBusinesses
MONEY SUPPLY MONEY SUPPLY ==
GDP =GDP =
• To increase the money supply, the Fed buys securities from the banks.
• To decrease the money supply, the Fed sells securities to the banks.
Open-Market OperationsThe Fed conducts Open-Market Operations when it buys & sells government bonds to and from the public:
A Monetary Policy Tool
Monetary Policy Tool #2Changing the Reserve Requirement
• Demand (checkable) deposit= balances in bank accounts that we can access “on demand” by writing a check- or using our ATM card
• Reserves= money received by banks that can not loan out
• Required reserves= demand (checkable) deposits multiplied by the required reserve ratio AKA Fractional Reserve Banking
Here’s how it works…
I deposit $100.00
Reserve Requirement Reserve Requirement ratio= 10%ratio= 10%
The bank loans The bank loans $90.00$90.00
$10.00 kept in reserves
Inverse Relationship
• There is an inverse relationship between the reserve requirement and the money supply
Reserve Requirement
Reserve Requirement Money Supply
Money Supply
Monetary Policy Tool #3Changing the Discount Rate AKA Interest
Rate
• Remember, this is the interest rate the Fed charges banks for loans
Discount Rate
Discount RateMoney Supply
Money Supply
Review: Actions of “The Fed”
– Poor Economy = Expansionary Policy• Buy securities, decrease reserve ratio, lower
the discount rate• GOAL= Expand the Money Supply
– Strong Economy = Contractionary Policy• Sell securities, increase reserve ratio, raise
discount rate• Goal= Reduce the Money Supply
Quick Review• What is an example of a public good?• What is an example of a private good?• What do most businesses provide –
public goods or private goods?– WHY?
• How do public goods exist, or how do they come to be?
• How does the government cover these expenses?
Public Goods• They are non-rival; meaning there is little
competition for them, because all people are granted to same “amount.”
– A city park– A public library– Public Highways– Community services– Community pest control
REMINDER: Public Goods are
funded by mainly through TAXES
Government’s Raising Money
• Taxes– Federal Gov’t – Income Tax– State / Local Gov’t – Income Tax, higher levels of
gov’t• User Fees
– Highway tolls• Fines
– Speeding tickets, littering• Monopoly Profits
– Lotteries– Liquor
• Borrow from the public– Bonds
Ben Franklin once said…
“There are only two certainties
in life: death and taxes.”
Taxes• Benefits-Received Tax Principle
– Definition – Those who value the benefit the most should pay the majority of the taxes.
– Example – A couple who has no children get no benefit from a the government building a neighborhood park…should they have to pay for this?
– Problem – free-riders – people may say that they do not value a particular service in order to avoid paying for the service at all or partially
Taxes• Ability-To-Pay-Tax Principle
– Definition – Those with a higher income should pay the majority of the taxes
– Example – Bill Gates should pay more for homeland security because he is wealthy
– Problem – Bill Gates doesn’t get anymore protection, he just pays a bigger portion
Tax Incidence• Proportional Taxation
•All taxpayers at ALL incomes pay the same percentage of tax
•AKA – “Flat Tax”•Example – If I make $20,000/year and the tax incidence is 10% I could contribute $2,000. If I got a raise to $100,000/year, I would contribute $10,000.
Tax Incidence• Progressive Taxation
– The percentage of taxes paid increases as my income increases
– This is the method that the federal and many state governments use
– Example – If I make $20,000/year and the tax bracket that I fall into in 10%, I would pay $2,000. If I got a raise to $100,000 then I would move into a higher bracket, and may end up paying $33,000.
Tax Incidence• Regressive Taxation
– The percentage of taxes paid decreases as my income increases
– The opposite of progressive taxation– Example – If I make $20,000/year and the
tax bracket that I fall into in 10%, I would pay $2,000. If I got a raise to $100,000 then I would move into a lower bracket (%age of my income), and may end up paying $8,000.
Other Taxes• Pollution Taxes and Sin Taxes
– Used to discourage certain activities– Fines for businesses that pollute the air,
water, and soil (EPA)– Heavy Taxes on cigarettes, liquor, etc.– Fine for littering along the highway