Economics Notes

Learning Targets 4/18/13

Describe how electronic banking has changed banking services
Recognize the steps in balancing a checkbook
Distinguish between money and near moneys
Know what is included in M1 and M2
Notes
Computers ushered in a new form of banking electronic fund transfers (EFT).

Automated teller machines (ATM)

Lack of privacy and possibility of tampering are risks of electronic bank transfers.

Customers have little float time between writing the check and its being cashed by the bank.

Electronic funds transfer act helped calm some of these concerns.

Learning Targets 4/22/13
Demonstrate knowledge of National Income Accounting.
Describe how the Federal Reserve System is organized.
Know the functions of The Fed.
Notes
Congress created the Federal Reserve System in 1913 as the central banking organization in the
United States.

Its major purpose was to end the periodic financial panics that had occurred.

Prior to Ben Bernanke, Alan Greenspan was appointed by Republicans and Democrats to four
terms.

Learning Targets 4/24/13
Describe how the Federal Reserve System Is organized
Know the functions of The Fed.
Notes
Board of Governors : 7 members, 14 year terms
Chairman and Vice chairman serve four year terms
Board of governors oversees the 12 district Federal Reserve banks.
12 members
The 7 governors
The head of the NY fed
4 other head of Federal Reserve district banks n a rotating basis
The Fed Open Market Committee is responsible for monetary policy.
Monetary policy involves the changing rate of growth of the supply of money I circulation in
order to affect the amount of credit, which affects business activity in the economy.
Twelve Federal Reserve banks are set up as corporations owned by member banks.
The Federal Advisory Council reports to the board of governors on general business conditions
in the country.
The Federal Open Market Committee decides what the Fed should do to control money supply.
Member Banks all national banks, those chartered by the federal government, must join the
Federal Reserve System; state chartered banks may join if they choose.
All institutions that accept deposits from customers must keep reserves in their district Federal
Reserve banks.
The Federal Reserve System has many functions.
Its most important function is to regulate the money supply.
Learning Targets 4/26/13
Describe the functions of the Fed.
Notes: Functions of the Federal Reserve System
Supervising banks
Holding Reserves for banks
Supplying paper money and coins
The Banker for the Federal Government
The Fed sets standards for consumer protection, mainly truth-in-lending laws
Most important function: Regulating the money supply in order to manage the overall economy
Monetary policy involves changing the growth rate of the money supply in order to change the
cost and availability of credit.
Learning Targets 4/30/13
Know the functions of the Fed
Understand how the federal government accomplishes its main economic functions
Notes: Role of government
Provide a legal system to make and enforce laws and to protect private property rights
In order for economic activity to occur individuals or private business must believe government
will act consistently and enforce civil contracts.
Learning Targets 5/2/13
Demonstrate how government can deal with negative externalities
Identify reasons for the growth of government
Describe the budget process of the federal government and the national debt


Notes Government growth
Total government purchases represent 18 percent of GDP, and all in spending is more than one-
third of GDP.
The true size of government may be greater than most estimates because of required private
sector spending.
In 1929, government at all levels employed about 3 million civilian workers.
Today, 2.9 million work for the federal government alone. It is the nations largest employer.
In total, the government at all levels employs over 20 million workers a six fold increase at a
time when the population has not even tripled.
In 2005, there were 7.240 federal workers making more than $150,000 annually, in 2010, there
were 82,034 workers, 3.9% of the federal workforce, making more than $150,000 annually.
CBOs current estimate of the budget deficit for fiscal year 2012 was 1.2 trillion.
The current estimate of the budget deficit for fiscal year 2013 is .9 trillion if the sequester holds.
CBOs baseline projection of the cumulative deficit for the 10-year period from 2013 to 2022 is
$6.4 trillion.
This would bring the national debt to over $23 trillion.
All this may be optimistic because it assumes no random shocks whether natural disasters,
environmental disasters, medical disasters, or military operations.
The Federal Budget and National Debt
Social Security first began in 1935 during the Great Depression. By about 2015, more money will
go out in benefits that will come in as revenue. This deficit will be covered by the surplus in
Social Security, but only until about 2040, when the trust will be bankrupt.
Learning Targets 5/6/13
Describe the effects of expansionary/contractionary fiscal policies
Know the criticism of fiscal policy
Identify the types or forms of taxation
Notes
Ensuring economic stability government tries to ensure economic stability by smoothing ups and
downs in the overall economy so that people do not feel the harmful effects of economic shifts.
John Maynard Keynes believed that the forces of aggregate supply and demand operated too
slowly in a serious recession and that government should step in to stimulate aggregate demand.
Fiscal Policy: Changes in federal government spending or tax revenues designed to promote full
employment, price stability, and reasonable rates of economic growth.
Expansionary Fiscal Policy: An increase in government spending and/or a decrease in taxes
designed to increase aggregate demand in the economy. The intent is to increase GDP and
decrease unemployment.
Contractionary Fiscal Policy: A decrease in government spending and/or an increase in taxes
designed to decrease aggregate demand in the economy. The intent is to control inflation.
Multiplier effects: Based on the idea that increased spending by consumers, businesses, or
government becomes income for someone else, and so on, leading to increased production in
an economy. Multiplier effects can also work in reverse when spending decreases.
Critics feel public goods should be provided by private organizations.
If people pay less tax, they can use that money to choose which goods they want.
Critics say redistribution programs discourage personal progress, incentives, and self -
development.
Critics argue economists do not know with certainty the size of multipliers or how long they take.
Events in other countries can affect the outcome of U.S. fiscal policy measures.
Critics also refer to the broken window fallacy of government spending.
Finally, critics argue that people do not always react to incentives as economists expect. For
example, during the Bush administration, tax rebates were given to stimulate economic activity
in 2008.
Only 20% of respondents in one study said they spent the rebate, Low income people in
particular did not spend the rebate.
Learning Targets 5/8/13
Review chapter 15 and 16 vocabulary
Recognize goals and kinds of taxes
Identify features of simple Federal Income Tax preparation
Learning Targets 5/10/13
Describe how and when to file a 1040EZ
Know they could prepare a simple Federal Income Tax Return
Know the four types of unemployment
Learning Targets 5/14/13
Know the 2 types of inflation and stagflation.
Describe injections and leakages in the circular flow of economic activity
Understand the quantity theory of money and the equation of exchange
Describe the monetary rule
Describe monetarists criticism of fiscal policy
Notes can we eliminate unemployment?
Full employment occurs when there is less than a 5% unemployment rate
Demand Pull Inflation theory that prices rise as a result of excessive business and consumer demand;
demand increases faster than total supply, resulting in shortages that lead to higher prices.
Cost push inflation theory that higher wages and profits push up prices.
Stagflation a combination of inflation and low economic activity.
Circular flow of economic activity
Government occupies a central position in the circular flow of income. By using fiscal policy, the federal
government partially controls the levels of leakages and injections. This, in turn, may control the overall
level of economic activity.
Removal of money is termed leakage
How can leakages be offset?
Injections of income into the economy through business investment and government spending.
Ideally, injections & leakages balance each other.
Keynes felt the cause of the Great Depression was an imbalance between injections and
leakages.
He felt one role of government was to step in and balance this relationship.
Friedrich Hayek
Advocated limited government.
Developed with Von Mises theories know as the Austrian School of economics.
Contributed the idea that prices serve as signals to producers and consumers.
Monetarism and the Economy
Monetarism: theory that deals with the relationship between the amount of money the fed
places in circulation and the level of activity in the economy.
Federal government shouldnt second guess businesspeople and consumers.
Federal government should resist using fiscal policy to stimulate or slow the economy
Government shouldnt operate a budget deficit to stimulate economy
Fed should allow monetary rule of a set smooth money growth (3 to 5 percent)
MV=PQ
M is the quantity of money in a society
V is its velocity of circulation
Q is the quantity of real goods and services created and sold during a year
P is the average price of those goods.
Learning Targets 5/20/13
Distinguish between Absolute and Comparative advantages.
Identify comparative advantages of various nations.
Identify comparative advantage in a scenario.
Notes Benefits of trade
Exports are goods sold to other countries.
Many products are manufactured in more than one country; some parts might be imported and
the rest made in the country.
Economies differ among nations due to differing natural resources, types and amount of labor,
and the amount of capital available.
Absolute versus Comparative advantage
Determining what to export and import depends on the relative costs of productive for different
items
Absolute advantage is the ability of one country to produce a product more efficiently than
another country. Absolute advantage = most advantage.
Specialization occurs when a nation finds it profitable to produce and export a limited
assortment of goods for which it is particularly suited.
Comparative advantage
Comparative advantage is the ability of one country to produce a product at a lower opportunity
cost than another country. Comparative Advantage = Lower opportunity cost.
Countries often specialize in and export products for which they have a comparative advantage
If French farmers are willing to feed us for less than it would cost us to feed ourselves, let us
eat French food and spend our time doing something else. David Ricardo, 1811.
Globalization
The world has become one financial market
The Japanese own about 20% of the office space in downtown Los Angeles.
A Thailand-based firm owns Chicken of the Sea Tuna.
Direct foreign investment (DFI)
Only 6% of American industries are foreign-owned.
American investors own over 40% of foreign-owned businesses worldwide.
In other parts of the world, people are concerned about American influence and power, even
with regards to cultural influences (economic imperialism).
Arguments for Globalization
Low wages better than no wages
Cheaper products
More people employed
Economic freedom leads to political freedom
Comparative Advantage
Life expectancy gone up dramatically
Better conditions
Arguments against Globalization
Large corporations crowd out local businesses
Destroys cultures
Takes away jobs from U.S.
Safety, pollution, child labor
U.S. doesnt pay foreign workers fairly
U.S. unfair trade (farm subsidies)