Transcript Click - SLPS

Chapter 24 and 26
Monetary Policy and International
Economics
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:
1. Medium of exchange: trade money for goods and services
2. Stores value: an individual can maintain wealth in the form of money.
3. Measure of value: society assigns a value using their monetary system.
4. Portable
Types of Money
Currency:
Coins (should we get rid of the penny?)
Paper money
Accounts for withdrawal
Savings Account
Checking Account
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Savings and Loans Associations (S&L’s): (becoming outdated)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
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.
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?
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
Monetary Policy
Controlling the supply of money and the cost of borrowing.
1. 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.
2. 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.
3. 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
Chapter 26
International Economic Principles and Systems
Independent vs. Interdependent
Why trade with other countries?
International Trade
WHY TRADE?:
1. Solution to scarcity: trade allows a diversity of natural
resources that a nation might not otherwise have
available to them.
2. Comparative advantage: the ability for one country to
produce specific goods/services at a lower cost or a
better quality than other nations.
3. More markets/job creation: creates more markets
outside of your country which can create job growth.
o
Problems with international trade?
Problems with Trade
Problems: Creates Competition- Loss of business to foreign
competition => Trade Barriers
1. Tariffs: a tax on an imported good/service
2. 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?
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
Economic Unions
The European
Union
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
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.
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.
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?
Socialist City
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.