Unit 6 Study Guide

1. What is a barter economy? (p. 278)

2. What is life like in a barter economy? Its diffcult because it takes a lot of time and effort to get what you want.(p. 278)

3. What are transaction costs? (p. 278)

4. Give the definition for money. (p. 279)

5. Give an example of a scenario using money. (pp. 279–280)

6. What gives money value? (p. 280) everything gives money values since it can be used to get anything

7. What are some differences between a money economy and a barter economy?

(pp. 280–282) the difference is that, money economy transaction cost excahnge is lower

8. In which is a person better off living? Money economy(pp. 280–282)

9. What are the three functions of money? (p. 282)

10. What is a medium of exchange? (p. 282)

11. What does it mean to say that money functions as a unit of account? (p. 282)

12. What is a store of value? (p. 282)

13. What do economists mean when they say that money serves as a store of value? Money stores better value than other things.

(p. 282)

14. What is the process of fractional reserve banking? They are backed by actual cash and can withdraw anytime (p. 284)

15. What is the most basic money supply sometimes called? M-1 (p. 285)

16. What is currency? (p. 285)

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17. What are Federal Reserve notes? (p. 285)

18. What are demand deposits? (p. 285)

19. What three things is the U.S. money supply composed of? (p. 285)

20. Why is a credit card not money? They used it to insure debt. (p. 287)

21. How are interest rates determined in a loanable funds market? Its mostly based on your credit score (pp. 288–289)

22. How does a change in the reserve requirement affect the money supply?it can affect money supply since that’s the spefic amount a bank should hold. (p. 304)

23. What are open market operations? (p. 305)

24. How does the Fed create money "out of thin air"? (p. 305)

25. Why does the overall money supply increase with an open market purchase? They can increase when government securities. (pp.

305–306)

26. Why does the overall money supply fall with an open market sale? It can fall if there is no one buying anything(p. 306)

27. What is the federal funds rate? federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.(p. 306)

28. What is a discount rate? (p. 306)

29. What is the federal funds rate target? (p. 308)

30. Why do some economists want a monetary rule by which the Fed has to abide?

(pp. 308–309)

31. How would a gold standard work? They work through another country's currency or paper money value directly linked to gold(pp. 309–310)

32. What is fiscal policy? (p. 378)

33. What is expansionary fiscal policy? (p. 378)

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34. What is the difference between expansionary and contractionary fiscal policy? (p.

378)

35. How can expansionary fiscal policy be used to help the unemployment rate go

down? (pp. 378–379)

36. What is crowding out? (p. 379)

37. How do some economists describe inflation? Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. (pp. 381–382)

38. How does contractionary fiscal policy reduce spending and decrease prices in the

Economy? Its refers to as government budget. So they don’t send too many money on something (p. 382)

39. Why did Keynes disagree with the classical school view of economics? (p. 383)

40. How are changes in taxes different from spending changes? Tax are states renvues. Spending changes isnt. (p. 383)

41. What is after-tax income? After-tax income is the amount of money that an individual or company has left over after all federal, state and withholding taxes have been deducted from taxable income.(p. 385)

42. How do taxes affect the spending side of the economy? They can affect you since it takes 15%~(p. 385)

43. How do taxes affect the producing side of the economy? When the economy is weak, for example, the Federal ReserWhen the economy is weak, for example, the Federal Reserve tries to boost consumer and business demand by cutting interest rates or purchasing financial securities.ve tries to boost consumer and business demand by cutting interest rates or purchasing financial securities. (p. 386)

44. What is the Laffer curve? a supposed relationship between economic activity and the rate of taxation that suggests the existence of an optimum tax rate that maximizes tax revenue. (p. 387)

45. What is monetary policy? its what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy.(p. 388)

46. What is expansionary monetary policy? A policy by monetary authorities to expand money supply and boost economic activity,(p. 388)

47. What is the difference between expansionary and contractionary monetary policy? An expansionary monetary policy is focused on expanding, or increasing while contractionary monetary policy is focused on decreasing the money supply in the economy.

(p. 388)

48. In what way does expansionary monetary policy work to lower the unemployment rate? They can lower by lowering interest rates(p. 388)

49. In what way does contractionary monetary policy work to reduce inflation? They can do that by reducing money supply (p.

390)

50. How does a gold standard work? gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.(pp. 393–395)

51. What is stagflation? stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high (p. 398)

52. Describe the steps that cause stagflation. Stagflation occurs when the government or central banks expand the money supply at the same time they constrain supply(p. 400)

53. What are the three major federal taxes? Income,sales and proterty(p. 406)

54. What is the federal personal income tax? A federal income tax is a tax levied by the United States Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. (p. 406)

55. What is the corporate income tax? Corporate income taxes are levied by the U.S. federal government and by states on business profits. (p. 407)

56. How is the social security tax divided? Its divided in medicare and other things.(p. 407)

57. What are three other state taxes? Hotel, Estate and  sin tax(p. 407)

58. What types of goods have a sales tax? Every item sellable in a store is taaxable(p. 407)

59. Name two goods that have an excise tax. Cigrattes, gasoline(p. 407)

60. Why is property tax important? its used to make up an important revenue source for state and local governments. (p. 407)

61. What is a proportional income tax? A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases (p. 409)

62. What is a progressive income tax? A progressive tax is a tax in which the tax rate increases as the taxable amount increases. (p. 409)

63. What happens with a regressive income tax? A regressive tax takes a higher percentage of earnings from lower-income people than those with higher incomes. (p. 409)

64. What are a couple categories into which the federal government has broken down  its spending? Mandatory spending, interest on federal debt(p. 416)

65. What is the money for national defense largely spent on? (p. 416)

66. What does income security refer to? A fixed income security is an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity.(p. 416)

67. What percent of total federal spending goes to social security? 60% (p. 416)

68. What does Medicare pay for? (p. 417)

69. What is the national debt? (p. 417)

70. Why does the government buy things where the total benefits are less than the

costs? (p. 418)

71. What is the federal budget? (p. 418)

72. What is the process for the president's budget recommendations? (p. 419)

73. How does the Congress play a part in preparing the budget? (p. 419)

74. What role do American citizens play in the budget? (p. 419)

75. What is the difference between a fiscal year and a calendar year? (p. 419)

76. How does the budget become a law? (p. 419)

77. What are the two historical principles of taxation that decide what a fair share is?

(p. 420)

78. What is the benefits-received principle? (p. 422)

79. What is the ability-to-pay principle? (p. 422)

80. What are budget deficits? (p. 422)

81. How is a budget surplus different from a budget deficit? (p. 422)

82. What did the Great Depression do to the accepted notions about budgets? (p. 423)

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83. What do budget deficits have to do with reducing unemployment? (p. 423)

84. How is the national debt incurred? (p. 424)

85. How does debt lead to higher future taxes?