Test VI Chapter 15

Federal Reserve Banking System The FED was created in response to the Panic of 1907, and fully empowered after the Great depression The FED is a quasi-government system of overseeing our economy The FED controls our nation’s Monetary Policy

Two (3) Goals of the FED 1) Fight Unemployment 2) Fight Inflation ?) Steady The Stock Market

Tools of The FED Setting Reserve Ratios for financial institutions Setting the Discount Rate for financial institutions FOMC operations

Tight Money Policy Fights Inflation Raise Reserve Ratio Raise Discount Rate Increases Interest on Government Securities in an effort to seduce financial institutions into buying them (FOMC operations)

Loose Money Policy Fights Unemployment Lowers Reserve Ratio Lowers Discount Rate Decreases interest rates on Government Securities in an effort to get financial institutions to sell off those in favor of loaning out money (FOMC operations)

Other FED Duties Check clearing Storing and transporting currency Removing bad currency from the market Responding to emergencies

Chapter 16 Income Redistribution Social Security – system put in place during the Depression to help supplement retirement income 1930s 18 – 1 Today 4 – – 1 Result either higher SS taxes or less benefits

Medicare – Government backed health care for the elderly Medicaid – Government backed health care for the needy and disabled

3 Types of Taxes Proportional (flat) – Social Security tax Progressive – Federal Income Tax Regressive – State sales tax Key is that we all want someone else to pay, but we want more services National Government received more tax money but distributes it to state and local governments

Keynes Theory Fiscal Policy – when to cut and raise taxes See diagram of the Business Cycle on the board Read page 428

Result of Using Part of Keynes Theory 13 Trillion Dollar Debt

Chapter 17 Unemployment and Inflation Unemployment rate - all those who are actively seeking a job, but unable to find one Full Employment 3 – 4% unemployment, this is really frictional unemployment If the unemployment rate gets to 9%, you have waited too late to do something about it

Two Types of Inflation Demand Pull – too much money chasing too few goods Cost Push – the price of one or two goods pushing up the prices of most everything else

Stagflation – high unemployment and high inflation at the same time (has occurred on once before) Discuss Fiscal Policy vs The Election Cycle Discuss time lags

Chapter 18 International Trade Trade should raise the standard of living of the world’s citizens because of absolute and comparative advantages Absolute Advantage – Middle Eastern Oil Comparative Advantage – American Aircraft

What does the U.S. do Best 1) Agriculture and Agri-Business 2) Aerospace 3) Entertainment

Exchange Rates Exchange Rates fluctuates and is based on the faith in that nation’s currency at the time

Free Trade- No Tariffs Protectionists – those who wish to protect domestic products by placing tariffs on foreign products N.A.F.T. A