How an Economy falls , introduction to concepts and vocab.

How an Economy Falls

introduction vocab

by Nickolas Pirini

Multiple Choice

What is an advantage of free markets?

• The advantage is the the people can freely travel to places that they are interested in going to

• The biggest advantage is that the government can set prices freely and make all participants happy

• The biggest advantage of a free market is the flexibility both the buyer and seller have in how they interact.

• There is not advantage. Freedom is bad. Control by the state is better because you can always trust those in power to do the right thing.

Multiple Select

How do governments affect the economy (you need to choose 3 of the options below)?

• Fiscal policy= how much should people and businesses be taxed. Why more should be spent on. For example, how much money should be spent on education, military, roads, police etc.

• Interest rate = central banks can set an interest rate.

• Governments can make as much money as they live with NO negative consequences because the government is always good.

• Quantitative easing= Central bank purchasing of government debt (bonds) and mortgage-backed securities.

Money creation​

​How is most of the money we use created?

​

​When you take a loan from a bank or use your credit card, new money basically created from nothing. So, the more loans a bank can make, the more money there is in the economy.

Multiple Choice

How is most of the money we use created?

• Money is created from people saving money.

• Most money is created when loans are made from a bank. Money can be created also from direct government payments.

• Money is created by working for others and receiving payment. 

• Money is created in factories. These factories are usually in China, but some are in India.  

​Fiat money

​

inconvertible paper money made legal tender by a government decree.

Or, the money that is used in a particular country

Multiple Choice

What is fiat money?

• Money that is illegal. 

• money that can be used to buy anything in any country

• Money that is linked to the price of gold

• inconvertible paper money made legal tender by a government decree.

Multiple Choice

What is a commodity?

• a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.

• Something can be used to legally buy and sell goods and services

• Something that has no value in itself. You cannot use to manufacture goods.

• This is another word for crypto currency.

​Productivity:

​

The number of things or services that can be done within a particular time. 

So, machines help us to become more productive as we can make more of something. Also, getting better at your job makes you more productive. Raising productivity usually leads to more profits and higher standards of living. But, it can also lead to job losses.  

Multiple Choice

Why is raising productivity important?

• It is important because money creation is important, and that is why we have banks. 

• The increase in productivity means that people lose their jobs.

• The increase of productivity increases the wealth of a country and its people.

​Interest rates

​This is the amount of extra money that can be made by loaning your money to another person. 

Banks don’t actually loan you money they have; rather, they create money that they will charge interest on. Once you pay the debt, the money is basically canceled. 

Increasing interest rates slow down the economy as fewer people take loans. So, fewer people will be buying things.

Decreasing interest rates speed up the economy. This can be dangerous as it can overheat the economy. This can lead to bubbles, inflation, and busts

Multiple Choice

Why might a government want to lower interest rates?

• to try and get people to save more money.

• To encourage people to borrow more money and thereby get more money into the economy

• To try and make bosses pay their workers more money.

Multiple Choice

Why might a government want to raise interest rates?

• To try and have deflation in the economy and get full employment. 

• To try and have more inflation in the economy and raise house prices

• To try and slow down the economy and prevent inflation.

​Bonds--government debt

​Debt that is sold that matures in more than one year. 

Buying these means you are lending government money and they will pay you interest on the loan.

Multiple Choice

Why do you think the US government wants to lower the interest rates?

• They want to lower interest rates so they can pay less interest on their bonds. This means they can borrow more cheaply. 

• They want to lower interest rates so that they can lend less money. If they can have less money, then they can give less money to people. 

• They want to lower interest rates so people can make less money on the r bonds. 

​Business cycle

​The economy has natural periods of growth and retraction (gets smaller).

​

​The boom (or expansion) in the economic cycle is when the economy gets too hot. Prices are overinflated-- this includes stocks, real estate, and commodities (especially oil).

​

The bust (or recession) period of the economic cycle is when bankruptcies become the norm and unemployment numbers are high.

Multiple Choice

What happens in the boom of the business cycle?

• The business will go in cycles and this will help people become much healthier than they were previously

• The economy is very slow. Banks with cut lending. The government will try to stimulate the economy.

• The economy gets over heated. There is inflation, stock markets are over bought, and house prices are at all time highs. 

Multiple Choice

What happens in the bust of the business cycle?

• The business will go in cycles and this will help people become much healthier than they were previously

• The economy is very slow. Banks with cut lending. The government will try to stimulate the economy.

• The economy gets over heated. There is inflation, stock markets are over bought, and house prices are at all time highs. 

​Keynesian economic theory

​This theory could be summarized as trying to make sure there is enough money in the economy so that the economy can continue to function. For example, government spending will increase in economic downturns to try and increase the flow of money in the economy. This will help maintain jobs and keep the economy healthy

Multiple Choice

How does Keynes's economic theory differ from traditional economic theory?

• Keynes believes that the economy can be stimulated by government spending. Government spending can prevent economic busts.

• Keynes believes that the government should cut spending and let bad investments fail (go bankrupt).

​Austrian economic theory

​Austrian economics is basically the opposite of Keynesian economics. They emphasize that excess money should not be created as this causes prices to rise and reduces the buying power of ordinary consumers (people). They prefer a stable form of money that cannot be easily printed. Gold has been the traditional favorite.

Multiple Choice

Why do Austrian economists try to prevent excess money supply?

• To try to make government sell more bonds and lower interest rates. 

• To try and get more inflation in the economy.

• To try and prevent excessive booms and inflation in the economy. 

​Free markets

​a market where things are freely traded (basically, without government interference).

​Markets are basically not as free as they used to be. Governments attempt to control prices in order to try and prevent a collapse in the stock market and economy.

Multiple Choice

In a free market, should a government be able to control the prices of things?

• no

• yes

​Budget deficits

​This is a measure of how much governments overspend (usually per year).

​Governments will cover this overspending by borrowing money-- issuing bonds.

​These days governments will buy their own bonds-- therefore, they are printing money!

Multiple Choice

What causes a budget deficit? 

• Governments spend more money than tax money they take in. 

• Governments spend less money than tax money they take in.

• Governments make free money and give it to all their people. People are no longer required to pay taxes.

Multiple Select

What are some ways governments can fund their budget deficits? (choose 3)

• Raise taxes

• Politicians pay the extra money themselves and apologize to the people of their country.

• cut spending

• issue bonds (borrow money)

​Asset vs. liability

​Students loan debt is a liability for those who borrowed money to go to university.

​However, it is an asset for the US government. In fact, the US government makes around half of its money from student loan interest payments. Without the student loan asset, the US government would be in more trouble than it is now.

Multiple Choice

If you borrow money from a bank to buy a house. is the loan the bank gave you an asset or a liability for the bank?

• not an asset nor a liability

• liabilty

• asset

Multiple Choice

Why is limited government prefered in in countries such as America?

• This is a way for countries like America to become more powerful

• America is a violent country that likes sports.

• To make sure that people can be limited in their power so that the rich can make more money.

• To prevent tyranny by those who have much power.

Multiple Choice

What do progressives want in politics?

• They want he state to control all the means of production and, therefore, power.

• They want to make a better society for all people by having the government make laws that benefit all people.

• They want to make sure that we have better technology

• They are just interested in helping the poor.

Multiple Choice

The idea of creating a Utopian world is something more to the politically left or right?

• Left

• right

• center

Multiple Choice

What is a budget deficit?

• The government prints more money.

• The government makes less money than it has.

• The government spends more money than it has