Unit 7 Review Topics Most Misunderstood Concepts

Discount rate vs. Prime Rate Discount Rate The interest rate offered by the FED to smaller banks. This interest rate is the one adjusted to try and stabilize the economy. Prime Rate The interest rate offered by banks for loans. This rate is effected by the discount rate. Banks must raise their rate above the discount rate to make a profit.

Fiscal vs. Monetary Policy Fiscal Policy Controlled by the “government” The budget: tax revenue and expenditures. Taxes are typically lowered in bad economies Monetary Policy Controlled by the FED They change interest rates and the amount of money available

Easy vs. Tight Money Policy Easy money FED lowers discount rate. Prints money Makes money easier to get. The gas pedal. Tight money FED raises discount rate. Destroys or puts money in bank. Makes money harder to get. The brake pedal.

Mandatory vs. Discretionary Spending Mandatory Spending that doesn’t require annual approval. Entitlement programs. Considered mandatory because many Americans would suffer without them. Discretionary Spending that does require approval annually. The military. Not considered mandatory. Although we always spend on military, the amount of money changes.

Causes of the Great Depression. 1.Speculation 2.Buying stock on credit 3.Consumer debt from buying goods with credit.