6. Basic Economic Concepts

Question 1

Monetarist Economic Position

Answer 1

Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation. The amount of money in the economy determines the overall price level over time; therefore, the Federal Reserve should control the growth of the amount of money in the economy in a gradual and predictable way.

Question 2

Inertial Inflation

Answer 2

Economic condition where the rate of price increases reaches a stable equilibrium (increases at a steady rate) and stays there until a shock to the system occurs, at which time, the rate of inflation changes

Question 3

Fed Operations

Answer 3

-Reserve Requirements
-Prime Rate
-The activities of the Federal Open Market Committee
-Money Supply

Question 4

Prime Rate vs Discount Rate

Answer 4

Prime Rate - Set by Banks

Discount Rate - Set by Fed

Question 5

Constant Dollars

Answer 5

Most accurate method of measuring GDP

mathematically adjusted to remove the effects of inflation

Question 6

Interest Rates vs Business Cycle

Answer 6

During periods of economic expansion, interest rates tend to increase and decrease during contractions.

Question 7

Fiscal vs Monetary Policy

Answer 7

U.S. fiscal policy is determined by the president and Congress through budgeting and taxation

Monetary policy is determined by Fed