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REVIEW QUESTIONS 1.) In which type of market structure does the consumer have the most available substitutes or choices? a) b) c) d) monopoly oligopoly monopolistic competition perfect competition 2.) Which of the following is a primary characteristic of a capitalist system? a) b) c) d) private ownership of property governmental regulation of business equal distribution of resources graduated income tax 3.) The Acme Furniture Company has issued a statement that they will be expanding production to include office furniture. This statement addresses which basic economic question? a) b) c) d) What will be produced? How will items be produced? For whom will items be produced? How much will workers be paid? REVIEW QUESTIONS Which of the following poses the greatest problem for unions in their attempts to gain higher wages and better benefits for their members? a)greater demand for the products they make b)increase in number of skilled workers c) increased union membership d)increasing global competition As one of the factors of production, capital is defined as: a) the raw materials necessary to produce goods. b) the equipment and factories needed to produce goods. c) the supply of labor needed to produce goods. d) the goods and services produced. Chapters 15, 16 and 17 Federal Reserve Money Banking 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 BanksN.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 Monetary Policy Tool #1 Open-Market Operations MONEY SUPPLY = GDP = Federal Reserve SELLS GOVERNMENT BONDS Consumers, Banks & Businesses A Monetary Policy Tool Open-Market Operations MONEY SUPPLY = GDP = Federal Reserve BUYS (back) GOVERNMENT BONDS Consumers, Banks & Businesses A Monetary Policy Tool Open-Market Operations The Fed conducts Open-Market Operations when it buys & sells government bonds to and from the public: • • To increase the money supply, the Fed buys securities from the banks. To decrease the money supply, the Fed sells securities to the banks. Monetary Policy Tool #2 Changing 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… $10.00 kept in reserves Reserve Requirement ratio= 10% I deposit $100.00 The bank loans $90.00 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 #3 Changing the Discount Rate AKA Interest Rate • Remember, this is the interest rate the Fed charges banks for loans Discount Rate Discount Rate Money 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, lower 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 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