Exam 3 Study Guide for Economics Food Fiber Systems | AAEC 1006, Study notes of Genetics

Download Exam 3 Study Guide for Economics Food Fiber Systems | AAEC 1006 and more Study notes Genetics in PDF only on Docsity! Exam 3 Review  Banks raise interest rates with increasing inflation o Results in even less spending  Demand curve: relationship between price & quantity demanded  As inflation rises, spending falls  Inflation: average goes up  Deflation: average goes down  Sticky downward?? (yes/no) o Yes: prices do not fall, they are stuck up o No: it is not sticky downward, prices & wages DO fall  Republicans vs. Democrats & sticky downward o Over time most goods to rise in price; however, prices of machines fall over time o Republicans: NO, not sticky downward (at least not in the long run) o Democrats: YES, they are sticky downward (in the long run we are all dead) o [Sticky Downward – inflexible] o Republicans & Democrats know democrats are [usually] right, but 3 main reasons why democratic graph works are:  Minimum wage  Unions  LIFO (Last in, first out) o Lay off lowest wage people first, raising average pay o Both Republicans & democrats agree on Yf (full employment) o You can still get a job at $2.00/hr with republicans, not democrats though  Fiscal policy: taxing & spending powers of government o Usually when cutting budgets you pay off some workers – LIFO – raises average wages of remaining workers o  Ratchet Effect o o Point C: more hired (i.e. Christmas) o Point A, Point C: equilibrium o When demand increases it puts more people into work; however, after [Christmas] demand curve falls back from D’ to D – when it falls back the new level of equilibrium is point D (Ratchet Effect) o Fewer people are employed than originally (*when a recession occurs the # of workers takes a hit, not the prices) o If wages & prices are sticky downward then in a recession jobs take hits – not prices o o Relates the amount of income tax revenue collected by the government to the tax rate o Tax revenues will be zero if the tax rate is zero – tax revenues will be zero if the tax rate is 100% as well (if the government takes all the income in taxes, there is no incentive to earn taxable income) o People can’t pay taxes or will move away there is no incentive to receive a higher salary – people won’t work as hard o If you are under point a, people will try hard to move up  Roles of money o Medium of exchange : more efficient than barter; people exchange their goods & services for money & then use this money to buy goods & services they want o Store of value : currency is legal tender; a person can hold onto money & use it to buy things later o Standard of value : comparison shopping, price of something tells us something about the quality of the product o Social intervention : money is a human idea & requires human acceptance o Convertibility : in 1971 President Nixon took us off the gold standard – federal reserve was originally limited to the amount of gold because that way you are forcing a rule on the federal reserve (no politics involved). Nixon took away the gold policy because it wasn’t practical/necessary anymore as long as the federal reserve makes good decisions we don’t need to tie money to something artificial  Types of money o M-1 : coins, currency, & demand deposits (checking accounts & NOW – negotiable order of withdraw – accounts) o M-2 : M-1 + savings, small time deposits, CD’s (certificate of deposit) o M-3…M-14 : Includes all prior levels of money ***TEST*** o Mutual funds: good investment; bank invests money into many different places & on average you receive a better income (spreads “risk” out)  Demand for Money o Transactions : everyday purchases (i.e. checking accounts) o Precautionary: need money for emergencies (car breaks down, going to doctors, plane tickets, etc); unpredictable events o Speculative: long term/investments (retirement, save to buy a car or house) – called speculative because you are hoping it will grow – we are speculative that it will grow  Secrets of the temple o Board of Governors on the front along with Ben Bernanke o NYT best seller, written by William Greider o “How the federal reserve runs the country”  Federal Reserve: manages the nation’s money supply o “Central Bank” of the U.S. o Money not in circulation o Fed is the nickname for the Federal Reserve ***TEST*** o 12 fed regions – each with ONE big federal reserve bank (Richmond) o NOT a commercial bank! – does not make profits o President of U.S. nominates governors of the fed but once approved the president CANNOT fire them – they do NOT work for the president o There has never been a major scandal regarding the federal reserve o Fed is separate from the president (check & balances) o The president, house of representatives, and the senate conduct fiscal policy but do NOT conduct monetary policy ***TEST*** (The fed conducts monetary policy)  Functions of the Fed o Issues (NOT prints) currency ***TEST***  The MINT prints money, not the Fed  Fed controls inflation o Processes checks (all checks will physically go through the federal reserve) o Holds reserves of commercial banks o Supervises commercial banks  Fractional reserve banking system: must keep a minimum % of deposits on reserve (either in a vault or on reserve in a bigger bank); everyday at close of market banks must have on reserve at least the minimum present – if they do not they must borrow enough money from another bank to temporarily fix the problem  Fed tool #1: Little R (r) o r = money creation Assume r = 10% 1/r = (1/.10) = 10 $36,000 (excess reserve) x m (multiplier) = $360,000 o Amount of money created = m x (excess reserves at bank A) where m= 1/r o 14 different kinds of money – some is computerized – not all is green money o How much money do we create? ***TEST*** Bank Initial Deposit Required Reserve Excess Reserve (loanable funds) A $40,000 $4,000 $36,000 B $36,000 $3,600 $32,400 C $32,400 $3,240 $29,160 ….. Totals $40,000 $360,000  Very little “green money” involved  Maximum increase of funds: $360,000  Max amount of loanable funds: $360,000  Max increase in nation’s money supply: $360,000 (ABOVE the $40,000 already in circulation)  If banks maximize loans other people can spend an additional $360,000 o What does the fed do to r if cases of inflation? ***TEST***  r is a monetary tool  If r is increased it lowers inflation  Banks can’t loan as much money out  If r is decreased it increases inflation  Fed tool #2: Discount rate o Federal funds rate : charged on overnight loans between commercial banks to each other to comply with r *established by supply & demand*  The Fed does NOT set the federal funds rate!! o Discount rate : charged by the fed to large banks (to borrow money overnight)  Sets a price ceiling on the federal funds rate (ALWAYS above the federal funds rate to set the ceiling – for big loans to big banks)  Fed sets the discount rate o Prime rate : what large banks charge to their best customers (gets lots of media attention) o Consumer rate : (small loans, personal rate) – car loans, student loans, etc (middle class loans) o *Don’t put more than $100,000 in one bank o *Don’t be confused by the word “federal” – the fed does NOT set federal funds rates they only set a “target” of what they want ***TEST*** o The fed DOES set the discount rate ***TEST*** o Example: Saturn wants ½ billion dollar loan – Dominion bank must be convinced they have collateral. Saturn will ask what the prime rate is – if Dominion wants to loan the money but doesn’t have it they can borrow the $ from the fed (discount rate being lower than prime rate). If the fed is in an expansionary mood they will want to increase the money supply. ***TEST*** IF the fed raises the discount rate it will raise prime rates which will in turn raise consumer rates  Fed tool # 3: Open Market Operations [buying & selling]