eeconomic freedom eeconomic growth eeconomic stability eeconomic equity eeconomic efficiency
TRANSCRIPT
![Page 1: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/1.jpg)
Role of GovernmentUnit 4
![Page 2: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/2.jpg)
Economic Freedom
Economic Growth
Economic Stability
Economic Equity
Economic Efficiency
Broad Social Goals
![Page 3: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/3.jpg)
Provide a legal system
Provide public goods
Correct market failures
Maintain competition
Redistribute income
Stabilize the economy
Role of Government
![Page 4: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/4.jpg)
Define property rights – Legislation
Transfer property – Contract Law
Protection of property- Criminal and Tort Law
Strategies in court proceeding – Game Theory
Legal System
![Page 5: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/5.jpg)
The right to private property is one of the most basic characteristics of the market system.
Must bewell-definedenforceable marketable
Private Property
![Page 6: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/6.jpg)
Laws that grant property rights to the creator of new ideas and new inventions.Patents Copyrights Trademarks
Intellectual Property Rights
![Page 7: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/7.jpg)
Lacks a strong legal system poor property rights lack of investment poor
economic growth
Why Capitalism fails other places?
In order for capitalism to function a country must have, enforceable, marketable, and well defined property rights
One solution: Grameen Bank Micro Loans
http://www.grameen-info.org/
![Page 8: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/8.jpg)
Who wrote, “In this world nothing is certain but death and taxes”?Benjamin Franklin
Who was the author of The Wealth of Nations?Adam Smith
Who wrote The General Theory of Employment, Interest and Money?John Maynard Keynes
What does TNSTAAFL stand for?There’s no such thing as a free lunch
Economic Quiz
![Page 9: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/9.jpg)
A good that, once produced, is available for all to consume, but the producer cannot easily exclude nonpayers.
Public Goods
![Page 10: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/10.jpg)
Shared consumption - one person consumes a public good, it does not prevent others from also consuming the good
Nonexclusion - once produced it is difficult if not impossible to exclude others from consuming the good, even if they did not pay for it.
Free Rider - people who consume a public good without paying for it.
Public Goods
![Page 11: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/11.jpg)
Exclusionary – can exclude those who have not paid for the good or service
Non shared consumption (Rival) – prevent simultaneous consumption by other consumers.
Private Goods
![Page 12: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/12.jpg)
Public? Private? Or Private with Shared? College education Electric Power National Defense Groceries Water Professional sports events Postal Service Interstate highway
facilities Elementary schooling Police protection
Theatres Flood control Spraying for Mosquitoes Toll roads Parks Cable TV Congested roads Ice cream Haircuts
![Page 13: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/13.jpg)
When some of the costs or benefits associated with the production or consumption of a product spill over to third parties, who do not produce or pay to consume the product.PositiveNegative
Externalities
![Page 14: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/14.jpg)
Negative Externalitiesare costs incurred by
someone who does not produce or pay consume a productExamples: pollution,
smoke, barking dogOverproduction/
overallocation Government taxes
or fines
![Page 15: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/15.jpg)
![Page 16: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/16.jpg)
Visual 5.2
Illustrating a Negative Externality
![Page 17: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/17.jpg)
Positive Externalitiesare benefits enjoyed
by someone who does not produce or pay consume a productExample: public
education, flu shot, fire protection
Underproduction/ underallocation
Government subsidy
![Page 18: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/18.jpg)
Visual 5.3
Illustrating a Positive Externality
![Page 19: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/19.jpg)
Correcting a Positive Externality
![Page 20: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/20.jpg)
A lack of well defined property rights enforceable, and marketable.
The Tragedy of Commons- Objects that are held “in common” by society that has no incentive to maintain them.
Examples: Environment, endangers species and public property.
Problem
![Page 21: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/21.jpg)
Policy #1 Create property rights that are: well defined, well enforced, and marketable. The fish are not over fished
Policy #2 Create a change in Benefit (X) or
Cost (X) through subsidy or tax.
Policy #3 Government Regulation
Step 3 Consider Policy Alternatives
![Page 22: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/22.jpg)
Kenya, Tanzania, Uganda- made it illegal to kill elephants and sell ivory-laws are hard to enforce and the population continues to decline.
Real Problems
![Page 23: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/23.jpg)
Botswana, Malawi, Namibia, Zimbabwe have made elephants a private good by allowing people to kill elephants but only those on their property. Landowners now have an incentive to preserve species on their own land.
Elephant population increasing (profit motive on its side)
Real Solutions
![Page 24: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/24.jpg)
Private PropertyFree EnterpriseSelf-InterestCompetitionMarkets and Prices Limited Government
Basic Characteristics of a Market System
![Page 25: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/25.jpg)
Benefits of CompetitionForces produces to
operate efficientlyLowers prices Improves the quality
of goods and services
Forces producers to be innovative
![Page 26: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/26.jpg)
Perfect Competition Monopolistic Competition OligopolyMonopoly
Market Structure
![Page 27: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/27.jpg)
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Adam Smith, 1776Wealth of Nations
![Page 28: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/28.jpg)
Monopoly Pure monopoly –
(rare) industry is the firm!
Near monopoly– single firm has the bulk of sales in a specific market
Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail
65%
90%
Intel -80%Western Union- 80%Brannock – 80%
![Page 29: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/29.jpg)
May be appropriate if natural monopoly
Encourages R&D
Encourages innovation
Development of some products not likely without some guarantee of monopoly in production
Economies of scale can be gained – consumer may benefit
Advantages of a Monopoly
![Page 30: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/30.jpg)
Consumer pays higher prices
Potential for supply to be limited - less choice
Potential for inefficiency –
X-inefficiency – complacency over controls on costs
Disadvantages of a Monopoly
![Page 31: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/31.jpg)
What can policymakers do?
Make a monopolized industry more competitive- Break it up.
Regulate the behavior of the monopolies
Turning some private monopolies into public
Doing nothing at all
Monopoly Regulation
![Page 32: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/32.jpg)
A few competitors in the market SupermarketsBanking industryChemicals
Covert Collusion: Cartels are illegal in the US
In 1993- Borden, Pet, Dean food companies plead guilty to rigging bids on prices of milk products sold to schools and military bases.
Overt Collusion: Cartel- a group of producers that typically creates a
formal agreement to how much they will charge or produce.
Example: Organization of Petroleum Exporting Countries: OPEC
Oligopoly
![Page 33: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/33.jpg)
Outcomes depends jointly on the actions of each participant.
Strategic behavior-self-interested behavior that takes into account the reaction to others
Mutual interdependence- a situation in which each firm’s profits depends not entirely on its own price and sales strategies but also on those of the other firms.
Game Theory
![Page 34: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/34.jpg)
Prisoner’s Dilemma
Confess Silent
Confess 3 yrs 3 yrs 0 20 yrs
Silent 20 yrs 0 1yr 1yr
Each player is individually better off confessing if the other player confesses or remains silent, but the best outcome for the group is to cooperate and both go free.
Dominant strategy is to confess, a Nash Equilibrium exists.
Bonnie –Prisoner 1
Clyde - Prisoner 2
![Page 35: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/35.jpg)
Adam Smith needs
revision
Dilbert announces
that his knowledge of the prisoner’s dilemma will save him.
Common knowledge is generally a dizzying concept. But, a single stage of reasoning, or even two, often misses strategic complexity, as in this episode
![Page 36: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/36.jpg)
The importance of knowing the game's rules, if the rules
of the game change, then the game can be rigged to one player's advantage.
Using Game theory to predict
behavior.
![Page 37: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/37.jpg)
Transfer of income from some individuals to othersthat money should be distributed to benefit the poorer
members of society
that the rich have an obligation to assist the poor
Questions Society must answerWho needs help?
How much?
How should it be allocated?
Private or public responsibility?
Redistribution of Income
![Page 38: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/38.jpg)
Progressive –average tax rate increases as the taxpayer’s income increases and decreases as the taxpayer’s income decreases.
Flat- average tax rate remains constant as the taxpayer’s income increases or decreases
Regressive- average tax rate decrease as the taxpayer’s income increases and increases as the taxpayer’s income decreases
Taxes
![Page 40: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/40.jpg)
An economics professor at Texas Tech said he had never failed a single student before but had, once, failed an entire class. That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer. The professor then said ok, we will
have an experiment in this class on socialism.
All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A. After the first test the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. But, as the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too; so they studied little. The second test average was a D! No one was happy. When the 3rd test rolled around the average was an F.
The scores never increased as bickering, blame, name calling all resulted in hard feelings and no one would study for the benefit of anyone else. All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great; but when government takes all the reward away; no one will try or want to succeed.
Could not be any simpler than that....
A Simple Story
![Page 41: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/41.jpg)
Deficit/Surplus/Debt Tax Revenue – Government Spending=
Deficit – negative balance government must borrow.
Or
Surplus – positive balance
Debt- The total accumulation of the deficits the Federal government has incurred through time. Total amount owed. US securities: Treasury bills, Treasury Notes, Treasury Bonds and US Saving Bonds 2008
2012$15,574,428,564,198.34
$10,852,628,401,130.22
![Page 42: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/42.jpg)
A Trillion Dollar
1 Million Dollars
$10,000
![Page 43: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/43.jpg)
100 Million Dollars1 Billion Dollars
1 Trillion Dollars
![Page 44: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/44.jpg)
![Page 45: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/45.jpg)
National debt is the sum of all securities issued by the US Treasury
US Debt
![Page 46: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/46.jpg)
US Deficit / Surplus
![Page 47: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/47.jpg)
Special Interest Pork Barrel Spending the
politicians win political favor with a small group of highly valued local constituents by spending on projects that cannot others wise be economically justified.
Logrolling trading votes to secure favorable outcomes can either diminish or increase in economic efficiency.
![Page 48: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/48.jpg)
The total market value of all final goods and services produced in a country in a year.
Gross Domestic Product (GDP)
Final good: A hamburger Intermediate good: meat, bun, lettuce, tomato
![Page 49: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/49.jpg)
Spending by households on goods and services such as food, rent, medical expenses and so on but does not include new housing. 2/3 of GDP
Consumer Spending (C)
![Page 50: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/50.jpg)
Spending by business on machinery, factories, equipment, tools and construction of new buildings.
Investment (I)
![Page 51: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/51.jpg)
Spending by people abroad on US goods and services (exports) minus spending by people in the US on foreign goods and services (imports)
Net Exports (Nx or X-M)
![Page 52: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/52.jpg)
Government Spending (G)Spending by all levels of government on
goods and services. Includes spending on the military, schools, and highways.
![Page 53: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/53.jpg)
Not included in GDP
Secondhand SalesIllegal activities Transfer payment Financial transactionsIntermediate Goods
Intermediate good: meat, bun, lettuce, tomato
![Page 54: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/54.jpg)
Business Cycle
![Page 55: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/55.jpg)
Changes in federal-government spending or taxes.Expansionary Fiscal PolicyContractionary Fiscal Policy
Fiscal Policy
![Page 56: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/56.jpg)
designed to stimulate the economy in a recession
↑government spending and/or
↓ taxes
Expansionary Fiscal Policy
![Page 57: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/57.jpg)
designed to slow down the economy to control inflation
↓ government spending and/or
↑ taxes
Contractionary Fiscal Policy
![Page 58: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/58.jpg)
Frictional - workers “in between” jobs
Structural- workers whose skills are not demanded by employers
Cyclical- workers unemployed because of a slow down in the economy (recession).
Unemployment Map
Types of Unemployment
![Page 59: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/59.jpg)
A rise in the general level of prices
Measurement of inflation CPI Consumer
price index
Inflation
![Page 60: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/60.jpg)
Germany Aug. 1922-Nov. 1923Inflation Rate 1,020,000,000,000%
Before 1920, one mark would buy a full meal for 2 By Nov. 1923, a foot high stack of 50M mark notes to
feed one couple. German prices rose at the rate of 41 percent per day
Hungary Aug. 1945- 1946381,000,000,000,000,000,000,000,000,000%
Octillions
Worst Inflation on Record
x-mas price index
![Page 61: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/61.jpg)
Money serves these functions:It is a medium of exchange It is a store on valueIt is a measure of value
What makes money important ?
![Page 62: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/62.jpg)
The central bank’s attempt to control the supply of money to influence the national economy.
Monetary Policy
Contractionary Monetary Policy Fed’s actions that contract the growth of the nation’s money supply for the purpose of reducing inflation
Expansionary Monetary Policy Fed’s actions to increase the money supply to lower interest rates and expand real GDP.
![Page 63: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/63.jpg)
Exchange equation M: the supply of money in the economy V: the velocity of money, number of times a
year the averageP: the overall price level in the economy,
reflecting the average price at which all output is sold
Q: the quantity of all goods and services produced; also know as real output
MV=PQ
![Page 64: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/64.jpg)
Will Rogers
“There have been three great inventions since the beginning of time: fire, the wheel, and central banking”
![Page 65: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/65.jpg)
The central bank for the US
Created in 1913
Chairmen of the Fed Janet Yellen
Federal Reserve Bank (FED)
![Page 66: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/66.jpg)
Conduct monetary policyAct as the nation’s bankServe as bankers bankRegulate some transactions at banks and
other financial institutions
Functions of the FED
![Page 67: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/67.jpg)
Federal Reserve Regions
![Page 68: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/68.jpg)
The Fed
![Page 69: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/69.jpg)
In which only a fraction of the total money supply is held in reserve as currency.
Banks create money with loans.
Repayment of loans destroys money.
Fractional Reserve Banking System
![Page 70: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/70.jpg)
a certain percentage of the deposits people make in the bank that the bank must keep in its’ vault.
Excess ReservePart of the deposit that is not required in
reserves that the bank may loan out.
Required Reserve Ratio
![Page 71: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/71.jpg)
Money Multiplier- 1 Reserve requirement ratio
Deposit X Multiplier = ↑ Money supply
Money Multiplier
![Page 72: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/72.jpg)
Discount Rate
Buying /Selling Government Bonds
Reserve Ratio
Fed’s Tool Box
![Page 73: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/73.jpg)
Interest Rate that the Fed charges bank for a loan
↓ IR- ↑ Money Supply
↑ IR- ↓ Money Supply
Discount Rate
![Page 74: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/74.jpg)
Selling of US Bonds-↓ money supply
Buying of US Bonds-↑ money supply
Most frequently used by the Fed
Buying /Selling Government Bonds
![Page 75: EEconomic Freedom EEconomic Growth EEconomic Stability EEconomic Equity EEconomic Efficiency](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649e025503460f94aed008/html5/thumbnails/75.jpg)
Changing the amount of reserves that a bank must hold.
↑ RR - ↓ Money Supply because bank will lend less money out.
↓ RR- ↑ Money Supply, lend more money out.Rarely used by the Fed
Reserve Ratio