What is the primary role of the Fed?

To regulate the U.S. money supply and supervise banking institutions.

What is the structure of the Federal Reserve?

A Board of Governors, 12 District Reserve Banks, and the Federal Open Market Committee (FOMC).

Actions by the Federal Reserve to expand or contract the money supply in order to affect the cost and availability of credit.

What are the three main tools of monetary policy?

The Reserve Requirement, the Discount Rate, and Open Market Operations.

Reserve Requirement (or Reserve Ratio)

The fraction of deposits that banks are required to keep in reserve and not loan out.

The interest rate the Federal Reserve charges on loans to commercial banks.

Open Market Operations

The buying and selling of government securities (bonds) by the Fed to alter the supply of money. This is the Fed's most used tool.

Easy Money (Expansionary) Policy

The Fed's policy to increase the money supply to fight unemployment and stimulate the economy. It involves lowering rates and buying bonds.

Tight Money (Contractionary) Policy

The Fed's policy to reduce the money supply to slow down the economy and fight inflation. It involves raising rates and selling bonds.

How does the Fed fight inflation?

By using a tight money policy (e.g., selling bonds, raising the discount rate).

How does the Fed fight a recession (high unemployment)?

By using an easy money policy (e.g., buying bonds, lowering the discount rate).

The use of government spending and taxation to influence the economy.

Who is responsible for fiscal policy?

Congress and the President of the United States.

Expansionary Fiscal Policy

Policy used to fight a recession. It involves decreasing taxes and/or increasing government spending.

Contractionary Fiscal Policy

Policy used to fight inflation. It involves increasing taxes and/or decreasing government spending.

Federal spending required by law, without the need for annual approval (e.g., Social Security, Medicare).

Discretionary Spending

Spending that must be approved by Congress in the annual budget (e.g., defense, education).

Occurs when the government spends more than it collects in tax revenue in a single year.

The total amount of money the federal government owes, accumulated from all past budget deficits.

Occurs when the government collects more in tax revenue than it spends in a single year.

A tax levied on the wages, salaries, and other income of individuals and corporations. This is the federal government's main source of revenue.

A general tax levied on consumer purchases of most products.

A tax on tangible and intangible possessions such as real estate. This is a primary source of revenue for local governments.

Financial Institution

An intermediary that channels savings from individuals and businesses to borrowers (e.g., banks, credit unions).

A for-profit financial institution that receives, keeps, and lends money.

A nonprofit service cooperative that is owned by, and operated for, the benefit of its members.

A certificate of ownership in a corporation.

A formal contract to repay borrowed money with interest at fixed intervals; essentially an IOU.

A company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies. It provides diversification.

Risk-Return Relationship

The principle that higher returns are associated with higher risks.

The strategy of holding a variety of investments to reduce the overall risk of loss.

The sum of people's skills, abilities, health, knowledge, and motivation. Investing in education increases human capital.

How are wages primarily determined?

By the forces of supply and demand in the labor market.

A number assigned to a person that indicates to lenders their capacity to repay a loan.

What factors impact your credit score?

Payment history, amounts owed, and length of credit history.

Interest paid only on the original principal amount.

Interest calculated on the initial principal and also on the accumulated interest of previous periods. It helps savings grow faster.

A practice or arrangement by which a company provides a guarantee of compensation for specified loss or damage in return for payment of a premium.

The fee paid to an insurance company for coverage.

The amount you must pay out-of-pocket for expenses before your insurance plan starts to pay.

A plan for making and spending money.

Certificate of Deposit (CD)

A savings certificate with a fixed maturity date and specified fixed interest rate. It is a low-risk investment.

Econ Unit 3 Flashcards Flashcards

Student preview

50 questions

Show all answers

1.

FLASHCARD QUESTION

Front

What are the three functions of money?

Back

Medium of Exchange, Unit of Account, and Store of Value.

2.

FLASHCARD QUESTION

Front

Medium of Exchange

Back

Something accepted by all parties as payment for goods and services.

3.

FLASHCARD QUESTION

Front

Unit of Account

Back

A common measure used to express the value of goods and services.

4.

FLASHCARD QUESTION

Front

Store of Value

Back

A property of money that allows purchasing power to be saved until needed.

5.

FLASHCARD QUESTION

Front

What are the four characteristics of money?

Back

Portability, Durability, Divisibility, and Limited Availability (Scarcity).

6.

FLASHCARD QUESTION

Front

Fiat Money

Back

Money that has value because the government has ordered that it is an acceptable means to pay debts.

7.

FLASHCARD QUESTION

Front

The Federal Reserve System (The Fed)

Back

The central bank of the United States.

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