Chapter 24 and 26

1. Chapter 24 and 26 Monetary Policy and International Economics

2. Chapter 24 • Finance: the study of money management and the allocation of assets. • Money only has context in the society that has deemed it acceptable. Explain. • Functions of Money: • Medium of exchange: trade money for goods and services • Stores value: an individual can maintain wealth in the form of money. • Measure of value: society assigns a value using their monetary system. • Portable

3. Types of Money • Currency: • Coins (should we get rid of the penny?) • Paper money • Accounts for withdrawal • Savings Account • Checking Account

4. Types of Financial Institutions • Commercial Banks: • For profit • We give loans to banks for interest. They give loans to customers for interest. • Store money (Keep Safe): Savings and Checking Accounts • Savings and Loans Associations (S&L’s): (becoming outdated) • For Profit • Savings accounts only, but higher interest rates • Primary function, give large loans • Credit Union: • Non-profit, union of people (business, union) • Share their money to give loans at high interest • Get loans at low interest rates

5. Banks • Checking Account: • You: Safely holds money which you have available. • Bank: Incentive to have a savings account and overdraft fee. • Savings Account: • You: Holds money and you receive interest • Bank: Bank loans money for profit • CDs (Certificate of Deposit): fixed interest rate, but you can’t touch for X number of years • You: higher interest rate and money is safe • Banks: Money stays in longer for a greater profit from loans.

6. Financial Regulation • Financial institutions are incredibly important to our economic system. How does the financial industry drive the American economy? • Since it so important to the American economy, it is heavily regulated by the government. But lobbyists from financial industries are always pushing for deregulation. • FDIC: Federal Deposit Insurance Corporation • Insures individual accounts in financial institutions up to $100,000 (currently $250,000) for each account. • Why? • What event sparked this regulation?

7. Federal Reserve System • Central bank of the United States • 12 Reserve Districts (12 banks) run by a Board of Governors (7 members) and a Fed Chairman (Janet Yellen) • Functions: • Banking regulations: overseas commercial banks and how they function • Consumer credit: create interest rates and laws that pertain to borrowing money • Act as the government’s bank and bank’s bank • Issues nation’s currency

8. Monetary Policy • Controlling the supply of money and the cost of borrowing. • Discount Rate: the interest rate charged by the federal reserve to commercial banks. • If the fed lowers the discount rate, banks will lower their interest rates. • If the fed wants to slow down the economy, it raises the discount rate. Explain. • Reserve limit: the minimum banks are required to leave in their vaults required by the Fed. - If the fed raises the reserve limit, it slows down the economy. Explain. • Bonds: The government buys and sells bonds at a set interest rate. • The higher the rate, the better investment. If you buy now, you aren’t spending in the economy. • Higher rate => Slows down the economy

9. Chapter 26 • International Economic Principles and Systems • Independent vs. Interdependent • Why trade with other countries?

10. International Trade • WHY TRADE?: • Solution to scarcity: trade allows a diversity of natural resources that a nation might not otherwise have available to them. • Comparative advantage: the ability for one country to produce specific goods/services at a lower cost or a better quality than other nations. • More markets/job creation: creates more markets outside of your country which can create job growth. • Problems with international trade?

11. Problems with Trade • Problems: Creates Competition- Loss of business to foreign competition => Trade Barriers • Tariffs: a tax on an imported good/service • Quotas: limits on the number of imports (limit supply = increases price) • Protectionism: government policy to protect domestic businesses from foreign competition by limiting trade through trade barriers. • Creates artificial high pricing on items and limits economic development • Solution?

12. Free Trade • If the problem is higher prices due to trade barriers…you remove trade barriers. • Free Trade: the idea or policy of countries limiting trade barriers in order to maximize trade and allow for prices at market value (equilibrium price). • Led to Economic Unions

13. Economic Unions • The European Union

14. European Union • Organization of independent European nations (political, military, and economic unity). • No trade barriers • Free movement of workers • Most have adopted same currency (the Euro) • Combined GDP • U.S. answer: NAFTA

15. NAFTA • North American Free Trade Agreement • Established the policy (and trend) towards free trade between Canada, United States, and Mexico. • Many feared that this would push jobs south into Mexico. • Proven to be a policy that has created as many jobs as it has lost.

16. Economic Systems • Market Economy vs. Command Economy • Markets Economy: economic production and consumption determined by supply and demand which is driven by the will of the private citizenry. • Decentralized (not controlled by the central government) • Are there any “pure” capitalist systems in the world? • What is the main motivating factor in the capitalist system? What is the effect on society? • Command Economy: Major economic decisions on production and consumption are controlled by the central government.

17. Command Economy • Socialism: a social and economic system characterized by the social ownership of the means of production and the overall management of the economy. • Great disparities of wealth exist in the market system (Owners are rich and Workers are poor) which creates classes • Workers unite to remove some of the disparities in wealth removing some of the class divides in society. • Pure Command Economy = Communism: society is broken into citizen controlled communes to decide how best to use use resources with no one person owning any of the resources. • Use of planning agencies void of any “government” structure • Are there any pure communist systems on earth?

18. Socialist City

19. Mixed Economies • Mixed economies: an economic system in which both private sectors and state control the production and consumption of resources. • As a society, we need to determine how much of one system or another is the right balance to meet our social and economic needs.