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| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
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| − | We’ve covered all the issues concerning individual decisions by companies and consumers. We’ve discussed supply and demand. We’ve addressed marginal revenue and marginal cost. We've discussed numerous other concepts of the free market. | + | We’ve covered all the issues concerning individual decisions by companies and consumers. We’ve discussed supply and demand. We’ve addressed marginal revenue and marginal cost. We've discussed numerous other concepts of the free market, including substitutes, complements, consumer surplus, price controls (ceilings and floors), the Law of Demand, normal goods, inferior goods, elasticity, cost measures, utility and indifference curves. |
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| − | Stephen Colbert, when interviewing your instructor on the Colbert Report, asked if we discuss "Keynesian economics." Your instructor answered "no", we discuss "free market economics." What is the difference? | + | Stephen Colbert, when interviewing your instructor on the Colbert Report on Tuesday, asked if we learn about "Keynesian economics." Your instructor answered "no", we learn "free market economics." What is the difference? |
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| | + | Keynesian economics is a theory that began with a liberal British economist named John Maynard Keynes (1883-1946). Became a favorite of liberals in England and his theories of economics were one reason England declined from being the greatest power in the world in the 19th century to a weak nation that could not fully defend itself against Germany in World War II (1940-1945). |
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| | + | His theory was the opposite of free-market or classical economics. Keynes insisted that government interference with the market was desirable and necessary. Keynes claimed that government spending was needed to reduce unemployment and stimulate economic growth. Under Keynesian economics, "bigger is better" with respect to government. Keynes argued that big deficits (excess of government spending over revenue) were actually a good thing to bring an economy out of a recession. |
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| | + | This course focuses on Microeconomics, while Keynesian economics is a topic in Macroeconomics, which is the study of national economies rather than individual firms and consumer decisions. So there will not be any questions on a CLEP Microeconomics exam about Keynesian economics. But it does appear in discussions about the federal budget and overall economy, and its basic meaning is this: increase government spending to stimulate the economy and reduce unemployment. It did not work well for England in the 20th century, as it went from being one of the very strongest economies to a distant second behind other world powers. |
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| | == Banking the Federal Reserve == | | == Banking the Federal Reserve == |
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| − | On the Colbert Report Tuesday, on the same show that your instructed appeared, there was discussion of the "Federal Reserve Bank." | + | On the same Colbert Report, Stephen Colbert discussed the "Federal Reserve Bank" and interviewed Senator Bernie Sanders, who calls himself a Democratic Socialist (which generated a humorous question). Senator Sanders called for the resignation or removal of Bernard Bernanke as Chairman of the Federal Reserve. What, you might ask, is the Federal Reserve? |
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| | + | Created in 1913, the Federal Reserve system is a network of 12 banks (one for each Federal Reserve district around the country) that serve as a "bank for banks." In each district, hundreds of banks belong to the local Federal Reserve Bank and rely on it for loans and deposits. The vast majority of all bank deposits in the United States are with banks that belong to the Federal Reserve system. |
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| | + | Long ago the economy relied on "commodity monies," which consisted of a commodity (such as silver or gold) serving the function of money. To buy food or pay rent, someone would pay with silver or gold pieces. But now we use "bank-debt money," such as paper dollars. If you read what it says on a dollar bill, can find the bank of which of the 12 Federal Reserve banks issued that dollar bill. |
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| | + | The Federal Reserve is supposed to protect the banking system against collapse, while also managing the system in an optimal manner. It has three basic tools for doing this: First, it can modify the required percentage of deposits that banks must hold in reserves, in case many depositors wanted to withdraw their money at the same time. This may surprise you but banks ordinarily keep only a small percentage of the deposits on hand; the vast majority of the deposits are loaned by banks to other people at a higher interest rate than what it is paying the depositor. This is how a bank makes money and can still pay interest to depositors. But the Federal Reserve (the "Fed") can increase or decrease the percentage that banks must keep on reserves. |
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| | + | The second policy tool -- and the one that attracts the most attention -- is when the Fed changes the interest rate it charges (its "discount rate") to banks. The higher that rate, the higher the interest becomes for many other types of borrowing. from mortgages to deposit rates. |
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| | + | Finally, the third way that the Fed affects the economy is in its market operations: it buys and sells U.S. government securities. |
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| | + | So why are some politicians calling for Bernard Bernanke to resign as Chairman of the Federal Reserve? Operating with virtually no oversight or accountability, Chairman Bernanke does not seem to have helped the economy much. National unemployment is 10% (as of December 2009) and many businesses are failing. |
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| | + | But students from Rutgers University just won second place in the annual College Fed Challenge, which requires an anlysis of about 40 economic indicators like unemployment, inflation, and gross national product (GNP), which is the total market value of all goods and services produced by a nation's economic during the year. |
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| | == Review: Short and Long Run == | | == Review: Short and Long Run == |