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THE FEDERAL RESERVE

Economics is the study, description, and analysis of the ways in which a society produces and distributes. In economics, the term goods and services refers to everything that is produced in the economyall products and services, including government services, such as national defense and the prison system. Economics is one of the social (as opposed to natural or physical) sciences, as are psychology and anthropology. Social sciences examine and explain human interaction. Because of this, the findings and knowledge produced by a social science generally cannot be as exact or predictable as those of a physical science, such as physics or chemistry. For instance, if you put water in a saucepan on a stove, you know with certainty that it will boil when it reaches 212 Fahrenheit. But if you are the governor of a state and you raise the state sales tax, you cannot be certain about the effect it will have. And you wont be able to answer any of the following basic questions: How much money will the tax raise? In order to avoid the tax, will people take more of their business across the state line? Will they shop more often on the Internet, where there is no sales tax (yet)?

Will companies in the state experience lower sales and generate lower corporate income taxes as a result?

Economics deals with these kinds of questions, but it seldom comes up with totally precise explanations or correct predictions. Why? Because human behavior in the economic realm is as complex and mysterious as it is in any other sphere of life.

Vocabulary: government , prison , national defense , interaction , certainty , sales tax , income tax , behaviour , to avoid , to raise , to experience , to deal with .

Find in the text: two parts of the state system; two other social sciences; two physical sciences; two types of taxes.

 

11. Match these words as they go together in the text.

produce and tax
goods and defense
national distribute
prison system
human services
sales interaction

12. Say if the following is true or false. Correct the false statements.

1. Social sciences study the natural world around us.

2. Physical sciences are more exact than social sciences.

3. Government services, such as national defense and the prison system are not studied by economics.

4. Human behaviour can be examined and predicted with much precision.

5. Water boils at 212 Fahrenheit.

6. The raise of sales tax always causes lower sales.

 

13. Tell about the two experiments described in the text.

 

14. Think and say what economics has in common with these sciences.

Psychology Mathematics History Biology

 

 

15. Read the text and choose the most suitable title for it.



What Is Economics and Who Cares? It's Not Perfect, but It Helps! Will That Be Large or Small?

The good news, however, is that economics can tell us the likely results of a sales tax. In addition, as a scientific discipline, economics provides extremely useful analytical tools and frameworks for understanding human behavior in the areas of getting and spending money, which (let's face it) occupies the majority of most people's waking hours.

Economics deals with fundamental, often life-or-death issues. That is why economics is important. Its challenge lies in its mysteries: We don't know when the next expansion or recession will come. We don't know if a federal tax cut will help the economy grow. We don't know which new technologies should be encouraged and which ones won't pan out ( ). And, tragically, we don't know how to overcome poverty, hunger, crime, and other evils rooted in economic reality. But economics is the branch of the social sciences most concerned with these matters, and it is the one that's well equipped to help us deal with them.

Economics provides a framework for understanding government policies, business developments, and consumer behavior here and abroad. It provides a rich context for making decisions in your business, professional, and financial life. The economy is to business as the ocean is to fish. It is the environment in which business operates. The more you know about this environment, the better you will function as a manager, analyst, and decisionmaker.

Vocabulary: likely , to provide , tools , framework , to occupy , majority , issue , , challenge , expansion , recession , to encourage , to overcome , poverty , equipped .

16. Match the parts of the sentences and write them down into your notebook.

ECONOMICS

can predict understand government policies, business development, and consumer behaviour.
provides context in the areas of getting and spending money.
deals with the likely results of economic activity.
is well equipped to help us fundamental, often life-to-death issues.
is concerned with human behavior for making decision in your business, professional and financial life.

 

17. Match these words as they go together in the text.

likely decisions 18. Remember the words. forecast , evidence , , pattern , , outcome , challenge , similarity, turn out long range trends , to be involved , stock exchange , variable , linear systems  
life-or-death poverty
overcome issues
government policies
business life
consumer behavior
making results
financial developments

19. Read the text and complete the charts to classify economics subdivisions according to different criteria.

1 Economics 2 Economics 3 Economics

The field of economics may be divided in several different ways, most popularly microeconomics (at the level of individual choices) versus macroeconomics (aggregate results). Today there is a view that good macroeconomics has solid microeconomic foundations. In other words, its theories should have evidential support in microeconomics. A few authors (for example, Kurt Dopfer and Stuart Holland) also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study. Theories developed as a part of economic theory have also been applied in other fields such as criminal behavior, scientific research, death, politics, health, education, family, dating, etc. This is allowed because economics is fundamentally about human decision-making. One of the main purposes is to understand how economies work, and what are the relations between the main economic players and institutions.

Economics can also be divided into numerous sub disciplines that do not always fit neatly into the macro-micro categorization. These subdisciplines include: international economics, development economics, industrial organization, public finance, economic psychology, economic sociology, institutional economics and economic geography.

Another division of the subject distinguishes positive (descriptive) economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion.

20. Comment on the classifications. The phrases in bold in the text will help you.

21. Define which sub-discipline deals with the following subjects and fill in the table.

Microeconomics   Macroeconomics  
   
   

 

household incomes national income employment inflation prices in local markets small businesses

THE FEDERAL RESERVE

 

The Federal Reserve System, also known as the "Fed," is an independent U.S. government agency. Its most important function is to manage the country's supply of money and credit.

The Federal Reserve System includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank branches. All nationally chartered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks. In general, a bank that is a member of the Federal Reserve System uses the Reserve Bank in its region in the same way that a person uses a bank in his or her community.

The Federal Reserve System is administered by the Federal Reserve Board of Governors, a group of seven individuals who are appointed by the president of the United States and serve overlapping 14-year terms. Although the Federal Reserve System is directly responsible to Congress, the governors are, by law, independent of political pressure from either Congress or the president. The board is expected, however, to coordinate its policies with those of the administration and Congress. Additionally, the Federal Reserve does not rely on Congress for funding; it raises all of its own operating expenses from investment income and fees for its own services. When a conflict arises between making a profit or serving the public interest, however, the Fed is expected to choose the latter.

The Fed's operation has evolved over time in response to major events. Established by Congress in 1913, the Federal Reserve was created to strengthen the supervision of the banking system and stop the periodic bank panics that erupted in the previous century. As a result of the Great Depression in the 1930s, Congress gave the Fed the authority to vary reserve requirements and to regulate stock market margins. In time, additional laws made it easier for the Fed to expand credit when a financial disaster seemed likely.

During World War II, Federal Reserve operations were subordinated to helping the Treasury borrow money at low interest rates. When the Korean conflict began and commercial banks sold large amounts of Treasury securities, the Fed bought heavily to keep security prices from falling. However, the Fed reasserted its independence in 1951, reaching an accord with the Treasury that Federal Reserve policy should not be subordinated to Treasury financing.

After 1951, the Fed focused more directly on domestic economic stabilization, aiming to keep interest rates low in recessionary periods and allowing them to rise in periods of rapid economic expansion. In the late 1950s, the Fed's emphasis was on price stability and restriction of monetary growth, while in the 1960s its policy stressed full employment and growth of output.

During the 1970s, credit expansion was too rapid, and mounting inflation hurt the economy. In 1979, the Federal Reserve adopted a policy aimed at more directly controlling the money supply rather than interest rates. This policy was successful in slowing the growth of the money supply, limiting the expansion of credit, and contributing to a lower rate of inflation. But it also contributed to recession in the early 1980s. In 1982, the Fed again deemphasized the controls on money supply growth and began working to bring about lower interest rates.

The Federal Reserve has three main tools for maintaining control over the total supply of money and credit in the economy. The first is the discount rate, or the interest rate that commercial banks pay to borrow funds from Reserve Banks. By raising or lowering the discount rate, the Fed can promote or discourage borrowing and, thus, alter the amount of revenue available to banks for making loans.

The second is the reserve requirement. These are percentages of deposits, set by the Federal Reserve, that commercial banks must set aside either as currency in their vaults or as deposits at their regional Reserve Banks. These percentages cannot be used for loans. In 1980 the Federal Reserve gained the authority to set reserve requirements for all deposit-taking institutions.

The third tool, which is probably the most important, is known as open market operations. It is the buying and selling of government securities. When the Federal Reserve buys government securities from banks, other businesses or individuals, it pays for them with a check (a new source of money that it prints) drawn on itself. When this check is deposited in a bank, it creates new reserves a portion of which can be lent or invested further increasing the money supply.

These tools allow the Federal Reserve to expand or contract the amount of money and credit in the U.S. economy. When there is more money to lend, credit is "loose" and interest rates tend to drop. In general, business and consumer spending tend to rise when interest rates fall. When there is less money to lend, credit is "tight" and interest rates tend to rise. Tight money is considered a particularly powerful tool for fighting inflation.

Yet certain factors complicate the ability of the Federal Reserve to use monetary policy to promote specific goals. First, it is hard to use monetary policy precisely because changes in the money supply do not cause immediate changes in the economy. An increase or decrease in the money supply may not affect the economy until other economic conditions have changed; the new conditions may interact with the change in the size of the money supply to create a totally unintended result. In fact, efforts to use monetary policy to achieve price stability sometimes have hampered efforts to achieve fuller employment, while efforts to use monetary policy to reduce unemployment sometimes have led to inflation. Additionally, the task of monetary policy is also complicated by the nation's balance of payments difficulties. For these reasons, the Federal Reserve tends to move cautiously, making very gradual changes in the money supply.

 

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Date: 2014-12-21; view: 172


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