ECONOMICS 201

Chapter 9, 10, 11, 12 and 18

CHAPTER 9-FISCAL POLICY

FISCAL POLICY IS THE DISCRETIONARY CHANGING OF GOVERNMENT

EXPENDITURES AND/OR TAXES TO ACHIEVE NATIONAL ECONOMIC
GOALS.

IF THE GOVERNMENT WANTS TO ENGAGE IN FISCAL POLICY TO CLOSE A

CONTRACTIONARY GAP, IS SHOULD INCREASE GOVERNMENT SPENDING
IN ORDER TO INCREASE AGGREGATE DEMAND

ESSAY QUESTION ON KEYNESIAN CROSS GRAPH AND HOW TO USE

THE CROWDING OUT EFFECT IS THE TENDENCY OF EXPANSIONARY

FISCAL POLICY TO CAUSE DECREASES IN PLANNED INVESTMENT and
PLANNED CONSUMPTION IN THE PRIVATE SECTOR.

The proposition that an increase in the federal budget deficit CAUSED ENTIRELY BY
A CURRENT TAX CUT HAS NO EFFECT ON AGGREGATE DEMAND IS
CALLED THE RICARDIAN EQUIVALENCE THEOREM.

According to the new classical economicsts, increases in government spending

unaccompanied by tax incrases will not necessarily increase aggregate demand because
consumers will consume less and save more to prepare for increased taxes in the future

According to the new clasical economists, if a tax cut is viewed as temporary, then there
may not be a significant increase in personal consumption.

SUPPLY SIDE ECONOMICS REFERS TO ATTEMPTS AT CREATING

INCENTIVES THAT WILL GENERATE increased productivity and output

SUPPLY SIDE ECONOMISTS ARGUE THAT LOWER TAX RATES WILL LEAD
TO INCREASED ECONOMIC GROWTH

One part of the supply side economics argument is that lower marginal tax rates can
increase total tax revenues.

Automatic stabilizers are provisions that cause changes in government spending and
taxes that do not take the action of Congress or the President

In the United States economy, the progressive income tax and unemployment
compensation are both automatic stabilizers
According to traditional Keynesian economics, expansionary fiscal policy initiated by the
federal government is an appropriate way to prevent recessions and depressions.

CHAPTER 10

MONEY IS DEFINED AS ANYTHING PEOPLE GENERALLY ACCEPT IN

EXCHANGE FOR GOODS AND SERVICES

TO BE ACCEPTED AS MONEY AN ITEM MUST PERFORM ALL OF THE

FOLLOWING FUNCTIONS EXCEPT- SERVE AS A STORE OF VALUE, BE A
MEDIUM OF EXCHANGE, SERVE AS A STANDARD OF VALUE, BE EASILY
REPRODUCED

The reason we are willing to accept money with no intrinsic value is that WE HAVE A
FIDUCIARY MONETARY SYSTEM IN WHICH CURRENCY HAS BOTH
ACCEPTABILITY AND PREDICTABILITY OF VALUE

THE PURCHASING POWER OF THE DOLLAR VARIES INVERSELY WITH THE

PRICE LEVEL.

THE OPPORTUNITY COST OF HOLDING MONEY IS MEASURE BY THE

INTEREST YIELD ONE COULD EARN BY HOLDING ANOTHER ASSET

BE ABLE TO CALCULATE M1-CURRENCY, COINS, CHECKABLE DEPOSITS

AND TRAVELERS’ CHECKS

BE ABLE TO CALCULATE M2 ADD TO M1 SAVINGS DEPOSITS, SMALL

DENOMINATION TIME DEPOSITS, MONEY MARKET MUTUAL FUND SHARES
OVERNIGHT EURODOLLARS AND OVERNIGHT REPURCHASE AGREEMENTS
AT COMMERCIAL BANKS AND MONEY MARKET DEPOSIT ACCOUNTS

The most liquid asset that exists is money

THE CENTRAL BANK OF THE UNITED STATES IS THE FEDERAL RESERVE

SYSTEM

WHICH OF THE FOLLOWING IS NOT A CORRECT STATEMENT ABOUT THE

FEDERAL RESERVE BANKS-

THEY PROVIDE A SYSTEM OF CHECK COLLECTION AND CLEARING

THEY ACT AS BANKER AND FISCAL AGENT FOR THE US GOVERNMENT

THEY SUPERVISE MEMBER BANKS WITHIN THE FED RES SYSTEM

THEY DO NOT PROVIDE THE ECONOMY WITH GOLD BACK CURRENCY

THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IS
APPOINTED BY THE PRESIDENT WITH APPROVAL OF THE U.S. SENATE.

A demand deposit account is a liability to a commercial bank

The Fed is said to be the lender of last resort in that it stands by to "bail out" any
depository institution that it has decided should not fail.

CHAPTER 11 and 12

A DECREASE IN THE REQUIRED RESERVE RATIO WILL CAUSE THE MONEY

SUPPLY TO INCREASE

The primary tool the Fed uses to control the money supply is open market operations

THE MONEY MULTIPLIER IS EQUAL TO THE INVERSE OF THE RESERVE

RATIO.

THE DISCOUNT RATE IS THE INTEREST RATE THE FED CHARGES ON LOANS
MADE TO DEPOSITORY INSTITUTIONS

In the Federal funds market, funds are repaid with the same 24 hour period

MONETARY POLICY IN REAL WORLD - LIKE HANDOUT QUESTIONS:

1. CALCULATE REQUIRED RESERVE RATIO

2. NEW DEPOSIT RECEIVED - HOW MUCH MORE CAN LOAN OUT

3. WITHDRAWAL HOW EFFECT RESERVES

4. ORIGINAL BALANCE SHEET HOW MUCH IN NEW LOANS

ANOTHER MC QUESTION GIVES DEPOSITS, CASH, DEPOSITS WITH FED AND

OTHER ASSETS - GIVES REQUIRED RESERVE RATIO - HOW MUCH CAN
LOAN IF A DEPOSIT IS MADE.

THE FEDERAL DEPOSIT INSURANCE CORPORATION INSURES THE DEPOSITS

HELD IN MEMBER BANKS

The FDIC was created because there were so many bank failures in the 1930’s

ESSAY QUESTION ON THE FEDERAL RESERVE PYRAMID AND THE

OPERATIONS OF MONETARY POLICY
CHAPTER 13 and 18

The price of bonds and the interest rate are inversely related.

In the classical view, an excess supply of money will lead to a higher price level.

Keynesians believe that when the Federal Reserve buys bonds, there will be an increase
in investment spending.

In an open economy, expansionary fiscal policy that creates deficit spending by U.S.
government borrowing is likely to lead to a reduction in exports.

THE EQUATION OF EXCHANGE IS MV=PQ

THE INCOME VELOCITY OF MONEY IS THE NUMBER OF TIMES PER YEAR A

DOLLAR IS SPENT ON FINAL GOODS AND SERVICES.

ACCORDING TO THE QUANTITY THEORY OF MONEY A PROPORTIONATE

INCREASE IN THE MONEY SUPPLY LEADS TO A PROPORTIONATE INCREASE
IN THE PRICE LEVEL.

MONETARISTS MAINTAIN THAT THE FED SHOULD ADOPT A MONETARY

RULE THAT SPECIFIES A CONSISTENT ANNUAL GROWTH RATE.

IN THE KEYNESIAN VIEW AN INCREASE IN MONEY SUPPLY WILL

DECREASE INTEREST RATES

Assume (other things constant) that the Fed increases the money supply. The mechanism
through which aggregate demand increases, according to Keynesians is increase in the
money supply – decrease in interest rates, increases in planned investment spending,-
increase in aggregate demand

CLASSICAL ECONOMISTS OFTEN REFERRED TO INFLATION AS A

SITUATION IN WHICH MORE MONEY WAS "CHASING" THE SAME QUANTITY
OF GOODS AND SERVICES.

THE FED’S OPEN MARKET COMMITTEE ENGAGES IN CONTRACTIONARY

MONETARY POLICY BY SELLING BONDS.

The Fed would be pursuing an expansionary monetary policy if it were lowering the
required reserve ratio.
The Fed would be pursuing a contractionary monetary policy if it were raising the
discount rate

The U.S. economy did not go into a recession after the 1987 stock market crash because
the Fed prevented that by increasing money supply.

The stock market boom between 1995 and 2000 had actually increased consumption and
decreased saving.

Between August and October of 1987, the value of U.S. stocks fell by almost $1 trillion.

Stagflation is an economic condition characterized by high inflation and high

unemployment.

If you buy a bond from a firm, you are lending money to the firm.

When interest rates rise, bondholders suffer a capital loss.

The payment on a bond is known as the coupon.

The price-earning ratio of a stock is the ratio of the price of a share of stock to the
company's total earnings per share.

When stock prices fall,household wealth and consumption both fall.