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