EC202 1nd EditionExam # 1 Study Guide Lectures: 15-27Lecture 15-allocation of savings to productive uses-economic Growth is enhanced by1. high rates of saving and investment2. the use of scarce saving to fund the most productive projects-allocation of saving-in free markets by a decentralized financial system-in command systems by a centralized bureaucracy-free market-oriented financial systems-both institutions and markets-banks, and bond and stock markets, for example-provide information to savers-ways to use the funds that are most productive-help savers share the risks-improves allocation to risky but productive projects-can misallocate resources if a “bubble” occurs-command economy:-misallocates resources -uses non-economic reasons to make allocation decisions-political favoritism often influences allocation decisions-difficult or impossible to obtain the needed information and expertise is lacking to be able to allocate efficientlyLecture 16-financial markets: the collections of households, firms, governments, banks, and other financialinstitutions that lend and borrow-global financial markets: lenders seek the highest possible real interest rate, and borrowers seek the lowest possible real interest rate in a single global financial market-organized in four groups:-1. bond markets-bond: a promise to pay specified sums of money on specified dates: a debt for the issuer-bond market: a financial market in which bonds issued by firms and governments are traded-2. stock markets-stock: a certificate of ownership and claim to the profits that a firm makes-stock market: a financial market in which shares of companies’ stocks are traded-3. short-term securities markets-short-term securities: include commercial bills and treasury bills )promises by large firms and government to pay an agreed sum no longer than one year in the future)-4. loans markets-banks and other financial institutions lower the cost of financing firms’ capital expenditures by accepting short-term deposits and making longer-term loansLecture 17-money: any asset that can be used directly in making purchases-currency and coin-checking account balance-principal uses of money-medium of exchange-unit of account-store of value-medium of exchange: an asset used in purchasing goods and services-reduces transaction costs-the alternative is barter-barter: the direct trade of goods or services for other goods or services-has very high transaction costs-requires double coincidence of wants-permits specialization in production-dramatically increases efficiency and living standards-other uses of money-unit of account-a basic measure of economic value-a yardstick for measuring value-prices expressed in dollars in the U.S.-store of value-an asset that serves as a means of holding wealth-not a particularly good way to hold wealth since most forms of money pay no interest-measuring money-M1: sum of currency outstanding and balances held in checking accounts and travelers checks-M2: all the assets in M1 plus some additional assets that are usable in making paymentsbut at greater cost or inconvenience than currency or checks-savings accounts, small time deposits, money market mutual funds + M1-the money supply: consists of…-currency in the hands of the public-deposit balances held by commercial banksLecture 18-bank’s balance sheet-assets: what banks own-liabilities: what banks owe-bank reserves: cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments-not part of the money supply because they are not circulating-reserve banking-100 percent reserve banking: a situation in which banks’ reserves equal 100 percent of their deposits-banks realize they don’t need to, and are not required to keep 100 percent of their deposits-most of the deposits sit there-banks can keep a smaller percentage and loan the rest to earn additional income-fractional reserve banking-reserve-deposit ratio: bank reserves divided by deposits-fractional-reserve banking system: a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100%-money creation: when a bank lends out reserves it creates deposits and, therefore, money-money supply = Currency held by the public + bank deposits-process of expansion of loans and deposits must end when all excess reserves are loaned out-there are no excess reserves when the reserve to deposit ratio drops to the level required by the FedLecture 19-Federal Reserve System (“Fed”): the central bank of the U.S.-two main responsibilities-1. monetary policy-determines how much money circulates in the economy and, thereby, influences interest rates-influences key macro variables -2. oversight and regulation of financial markets-history of the fed-a government agency created by the 1913 Federal Reserve Act-pursuing public goals of growth, low inflation, and smooth operation of financial markets-details of the fed-consists of 12 regional banks-each represents a geographic area in national policymaking-each provides services like check clearing-headquarters is located in Washington D.C.-board of Governors-the leadership of the Fed-consists of seven governors appointed by the president to staggered 14-year terms-Chair of the Board also appointed by the president for a term of 4 yearsLecture 20-short run fluctuations-irregular in length and severity -have widespread impacts-unemployment rises during a recession and falls during an expansion-recessions tend to be followed by a decline in inflation and are often preceded by an increase in inflation-durable goods industries are more sensitive and services and non-durable goods industries less sensitive-recession (or contraction)-a period in which the economy is growing at a rate significantly below normal-informally, a period during which real GDP falls for at least 6 consecutive months-recent recessions have lasted between 6 and 16 months-depression-a particularly severe or protracted recession-expansion-a period in which the economy is growing at a rate significantly above normal-normally lasts longer than recessions-boom-a particularly strong and protracted expansion-characteristics of fluctuations-expansions and recessions are-felt throughout the economy and often globally-felt not just in a few industries-the unemployment rate -typically rises sharply during recessions-the unemployment resulting from a recession is called cyclical unemployment