Chapter 24 and 26Monetary Policy and

International Economics

Chapter 24Finance: 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 withdrawalSavings 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Savings and Loans Associations (S&L’s): (becoming outdated)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

BanksChecking 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 CorporationInsures individual accounts in financial institutions up to $100,000 (currently $250,000) for each account.

Why?

What event sparked this regulation?

Federal Reserve SystemCentral 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 PolicyControlling 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 TradeProblems: 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 UnionsThe 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 SystemsMarket 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 EconomySocialism: 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.