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Mutual Fund – sells shares to the public and uses the proceeds to buy a selection, or portfolio of various stocks and bonds. 2. A government budget deficit is an excess of government spending over tax revenue. This affects investments and the economy because in order for the government to reduce the deficit they will need to cut programs and raise taxes. Higher taxes mean people spend less, invest less and the economy will decline due to lack of consumers spending money. 3. A benefit from insurance is the coverage of risk and accidents. Adverse Selection : A high risk person is more likely to apply for insurance.
Moral Hazard – after people buy insurance they are more likely to be less cautious because the insurance company will pay for all the risk involved. 4. Efficient market hypothesis is the theory that asset prices reflect all publicly available information about the value of an asset. One piece of evidence that is consistent with this theory are the shares of companies in the stock exchange. The news and public information on a company greatly affects the demand of shares in a particular company and if the demand rises, so does the price. If the demand falls, the price will drop as well.
Just by looking at the history of a stock’s prices, it will give general knowledge on how well a stock will do in the future. 5. The three main categories that the Bureau of Labor Statistics divides people into are a) employed, b) unemployed, and c) not in the labor force. The BILLS computes the labor force adding the number of employed and the number of unemployed together (Labor force number of employed + number of unemployed). The BILLS computes the unemployment rate by dividing the number of unemployed workers by the number of those in the abort force, multiplied by 1 00 (Unemployment rate= number of unemployed/ labor force x 100).
The BILLS computes the labor-force participation rate by dividing the labor force by the adult population, multiplied by 100 (labor-force participation rate-?? labor force/adult population x 100). 6. Frictional unemployment is inevitable because the economy is always changing. The government can reduce frictional unemployment through government-run employment agencies that give out more information about open job positions. Another way the government reduces frictional employment is by providing public training programs which can ease the changeover from declining to growing industries. . Union advocates claim that unions are imperative to helping companies respond efficiently to workers’ concerns and complaints. When an employee accepts a job, he/she must discuss terms of hours and benefits with their company. By doing this, unions allow firms to provide the right mix of job characteristics. Advocates also claim that unions destruct firms that will only hire in a certain area. If those workers do not accept the wages and benefits offered by these firms, they are forced to leave the area and live elsewhere. 8.
One factor that prevents the Federal Reserve from controlling the money supply perfectly is monetary policy. Monetary policy is the setting of the money supply by policy makers. The monetary policy is made by the Federal Open Market Committee and it has the power to increase or decrease the number of dollars in the economy. If the Federal Reserve needed to contract the money supply, it would set its policy based on open-market operations by buying or selling bonds. The bonds are purchased from the public in the bond arrest and the money used by the Fed to pay for these bonds increases the number of dollars in the economy.
Another way the Fed can set its policy to contract from the money supply is through reserve requirements that regulates the minimum amount of reserves that banks are required to hold against deposits. With the reserve requirements, a decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply. Lastly, the Fed can use the discount rate which is the interest rate on loans that the Fed gives to banks. The Fed can change the none supply by changing the discount rate. A lower discount rate encourages banks to borrow reserves from the Fed.
As a result, this increases the quantity of the reserves and the money supply. 9. Nominal variables are variables measured in monetary units. An example of a nominal variable is the income of a farmer as it is measured in dollars. Real variables are variables measured in physical units. The amount of crops and cattle sold by a farmer is a real variable as it can be measured by the number of crops and cattle. According to the principle of monetary neutrality, hangers in the quantity of money can affect the nominal variables. 10.
What are the costs of inflation? Which of three costs do you think are most important for the U. S. Economy? There are 6 costs of inflation: slathered costs, menu costs, increased variability of relative prices, unintended changes in tax liabilities, confusion and inconvenience, and arbitrary redistributions of wealth between debtors and creditors. Of these 6, the three most important costs of inflation for the IS. S. Are arbitrary redistributions of wealth between debtors and creditors, menu costs, and slathered costs.