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All main topics / Economics / History of Economics

Econ 2200 Exam 2 (119 Cards)

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The title of Chapter 17 is "         1          Expansion and Concentration."  It focuses on the rapid and significant growth of          2          .
1) Industrial
2) Industry
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The first US census to report the money value of manufacturing was greater than the value of agricultural output was taken in           (year).
1890
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T/F: Tables 17.1 and 17.2 basically show that output during the Reunification Era grew by a larger multiple than the labor force.
True
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T/F: In class we listened to a radio clip about shareholders who owned stock in US corporations during the Reunification period.
False - 18th-century ship captains who transported English prisoners to Australia.  It proved cheaper to maintain them properly than treat them poorly when the government started paying by the prisoner delivered.
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According to Table 17.5, the                                  (2 words) per worker rose from 1860 to 1910.  This reflects the rapid transformation from an agricultural to a manufacturing-dominated economy.
Value added
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The formula for Value Added is...
VA = Total value of output - material costs
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T/F: Value Added reflects both labor and capital productivity.
True
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In 1900, Germany is ranked second in manufactured goods to what country?
the US
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By 1915, the US produces 1/      of the world's manufacturing output. 
1/3
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T/F: The changes from 1860 to 1910 in Value Added reflect Income inelasticity.
False: elasticity
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Which of the following categories was NOT spurred by growth in the Reunification Era?

A. Technology
B. Racial Discrimination
C. Energy Sources
D. RailRoads and National Markets
E. Management
B. Racial Discrimination

Growth fueled changes in everything else.  Sorry, this isn't a very well written question.
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What two innovations led to mass production and economies of scale?
1. Standardized interchangeable parts
2. Continuous flow operations
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Lower                    costs created National Markets for manufactured goods via Railroad.
transportation
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In 1850, 75% of all power is generated by          1          .
By 1890, 90% of manufacturing energy is generated by        2             3        remained the dominant energy source through the mid 1900s.
1. Animals
2. Coal
3. Coal
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                         were the first US businesses to use professional managers and practices for complex production processes.
Railroads
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The          A           management principles state:
1) A manager's decision making authority should be equal with their                                          B                                          .
2)          C           reporting and auditing to identify problems and suggest solutions.
3) Routine                     D                        (2 words) of all employees (including managers).
A. McCallum
B. level of responsibility in the firm
C. Internal
D. performance evaluations
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F. Taylor created                       Management which reduces worker movement to what is necessary and reduces worker fatigue.
Scientific
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What were the three reasons (discussed in class) it is economically beneficial to form a corporation?

1. Limited Liability (limited to the value of your        A       )
2. Unlimited life
3. Access to financial capital through issuing         C       .
A. investment

C. stock
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What are the three benefits of a corporation?
1.
2.
3.
1. Limited liability (to your investment)
2. Unlimited life
3. Access to financial capital through issuing stock
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When corporations emerged during the Reunification era, the complexity of operations increased because of what two factors?
Mechanization and Mass production
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From 1900 to 1921, the average number of factory employees increased from         to           .
25 to 40
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T/F: A trend during the Reunification era was owners more involved in the day to day running of the company and less reliance on paid professional managers.
False - less owner interaction and more reliance on paid prof. managers
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Investment banking assists firms in accessing                             (2 words), most importantly through sales of corporate stock.
financial capital
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T/F: Limited corporate liability (to the size of your investment) was accepted in most states by 1860.
True
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What four reasons, discussed in class, provided for the growth of "big-business"?
1. Market size and urbanization
2. formal financial markets develop
3. a positive legal environment
4. Economies of scale
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Economies of scale provided for growth in big business with specialization of trade and mass production.  Most firms also found that as         A         increases, average cost decreases.  So there is a potential for more profit by          B                            (2 words).
A. output
B. getting bigger
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In the long run, firms want to (increase/decrease) ATC.
decrease - ATC= Average Total Cost, so by decreasing it, there's more room for profit
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T/F: As firms grow, they become more aware of competitors.
true
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Economic profit is equal to...
Q(P-ATC)

Quantity times (Price minus Average Total Cost)
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T/F: Firms will high fixed costs tend to have more of an incentive to monopolize.
True
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Know this graph pretty well:
There was a quiz question over this graph, so there will probably be a test question.
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What are the three "Legal environment" reasons big business grew?
1. limited liability
2. easy incorporation (incorporation became administrative)
3. limited oversight by Fed. gov, even after Sherman/Clayton Acts
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The Merger Movement took place from the              s      to              .
1870 to 1905
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The total value of combined firms in the US in 1890 was about $             .  In 1903, it was about $            .  In 1904, it more than doubled at $                .
1 billion
3 billion
7.2 billion
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Pooling arrangements (aka Cartels) are different from Gentlemen's agreements in that they lower/restrict                   .  Gentlemen's agreements set a certain              for agreeing firms to sell.
quantity

price
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T/F: Gentlemen's Agreements and Pooling Arrangements are legal, but highly regulated by the Federal government.
False - they were and are illegal
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How can someone cheat in a Gentlemen's agrmt? What about a Pooling argmt?
G: Cheater can earn short-run profit by charging a price less than that agreed upon

P: Cheater can earn short-run profits by producing a larger quantity than that agreed upon
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Cheating can ultimately lead the market back to                        (2 words).
competitive equilibrium
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Another problem with Gentlemen's agreements and Pooling arrangements is the entry of new firms into the market.  How does entry effect existing colluding firms?
A new firm will charge less and earn a short-run profit until the other firms become competitive again out of necessity.
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What is a trust?  Is it legal?
A trust is when the control of several firms is handled by several "trustees." Shareholders of various competing firms hand over shares and voting rights in return for "certificates of trust."

It was legal until the 1890s when it was outlawed.
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What is a holding company?  Is it legal?
A holding company comes about when one firm owns shares in another.  Firms continue to operate under their own charter, but the decision-making and voting rights are controlled by the holding company.

Yes, holding companies are legal in most states.
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What is a horizontal merger?  What is its effect on the competition?
a combination of firms that produce a similar product

it reduces competition for the product

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T/F: Most horizontal mergers were concentrated in the consumer goods industry.
True
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Why were most horizontal mergers concentrated in the consumer goods industry?

1. response to excess capacity and                  prices
2. urbanization and (increased/decreased) income
3. increased                  for consumer goods
4. They are                  goods
1. falling
2. increased
3. demand
4. normal
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T/F: Horizontal mergers in the consumer goods industry allowed for economies of scale and a minimum LRAC at capacity output.
True
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Firms experience losses when Price                       and LRAC                          . (↑ or ↓)
decreases

increases
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T/F: Many refineries were reluctant and irritated to sell to Standard Oil.  Ira Tarbell was correct in bashing Rockefeller.
False - Many refineries were glad to sell because they were operating at a loss.  Ira may not have been right.
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By 1878, Standard Oil controlled          % of US refining capacity.
90%
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How did Rockefeller reach a minimum LRAC with Standard Oil?
He bought up the competition and shut down the least efficient firms, which allowed the remaining firms to operate at capacity (which we know is usually the most efficient state) for a min LRAC.
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T/F: Rockefeller increased prices in oil to make a larger profit.
False - he kept them from falling anymore, and utilized economies of scale to lower the LRAC
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In             (year) the US Supreme court dissolved Standard Oil into 34 separate firms that did not act as holding companies.
1911
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The horizontal merger wave lasted from             to             .
1879 to 1893
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The Vertical Merger wave was from          to          .
1898 to 1904
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A forward vertical merger is when you buy a company that...
you formerly sold to.  You are moving forward into the market.
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A backward vertical merger is when you buy a company you formerly...
bought from.
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Urbanization led to increased demand for what two things?
1. Processed consumer goods
2. Infrastructure
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The demand for Processed consumer goods meant that firms began to both produce and              goods.
market
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According to Chandler, mass production firms have an incentive to vertically merge because...
firms depend on continuous flow operations.  Firms must arrange their inputs and outputs to effectively use their capital.
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Explain the US steel situation.  How much capacity did US steel control?  Does the Supreme court find this merger ok?
Carnegie Steel has a strong backwards vertical integration.  Federal and National Steel have strong forward vertical integration.  The three firms horizontally merge to crate US Steel that has full vertical integration.  Individually, they are worth $700 million, together, they are worth $1.4 billion because of economies of scale.

US Steel controlled 1/2 of steel making capacity and huge amounts of cole, ore, and transportation.   

Supreme court is chill with it all because they didn't do anything to harm consumers.
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What does Deadweight loss measure? 
societal loss from monopoly control of the market which is the combined lost consumer and producer surpluses
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
1) Firms grew, but so did markets
Monopoly power depends on the size of the firm relative to the market and cheapening transportation brought firms into competition with local businesses, expanding markets.
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
2) In some local markets, competition actually increased.
transport costs were decreasing, so firms could compete in national markets with local brands
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
3) Few firms managed to maintain monopoly power
short-run monopoly power usually didn't last because of competing firms entering the market from a low cost of entry
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
4) Most markets were closer to oligopolies
firms usually had limited competition, which was close to a competitive market
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
5) Diversification meant availability of substitutes
Goods with more substitutes have a more price elastic demand, so it limited the market power of a monopoly firm
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Economic theory suggests that monopoly will increase price and decrease quantity.  However, from 1864 to 1914, real prices were falling and output was increasing in manufactured goods, transportation, and financial services.  Why is that?

Explain:
6) Technological change meant opening of barriers to entry
Tech advancement reduces the marginal cost of production for existing and new firms, so competition ensues because of greater ease of entry.
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T/F: In the Reunification era, competition increased in most sectors.
Sho 'nuff - despite merger activity, competition increased
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What declared illegal "every contract, combination in the form of a trust, or otherwise, or conspiracy in restraint of trade among the several states"?
Sherman Antitrust Act
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What was the finding in EC Knight v. US?
EC Knight was not in restraint of interstate commerce since it was a manufacturer, even though the company that owned EC Knight cornered 98% of the sugar refining market.
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What did the Supreme court rule in US v. Addysston Pipe and Steel Company?
Sherman act does apply to collusive agreements among firms supposed to be in competition with each other, but mergers were still legal.
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According to Lamoreaux, the second phase of mergers (Vertical merger wave) was spurred by the desire to suppress what?
price competition
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              -                      was a major selling point of Teddy Roosevelt's 1904 campaign.
Trust-busting
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The "            of                   " was the court's exercise of judgement when determining whether a firm is in restraint of trade.
"Rule of Reason"
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T/F: The US Supreme Court busted US Steel for predatory pricing.
False - they were actually impressed by US Steel's ability to stay out of legal transgressions despite being so large.
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What was the purpose of the Clayton Act?
To remove ambiguities and target a few specific behaviors such as price discrimination against buyers, exclusive contracts, interlocking directorates (if it lessened competition), and stock acquisition of a competitor.

It also established the FTC (Federal Trade Commission) to enforce the act. 
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Why was the Clayton Act weak?
While courts easily determined whether an action was in violation of the act, they had a hard time deciding whether it lessened competition or promoted monopoly.  Reasonable monopoly practices and weak collusion was not susceptible to action.
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Why did the Sherman Antitrust act achieve little, according to the book?
The kind of competition envisioned by the writers of the act was actually helpful and protected consumers.  The fall in communication and transportation costs helped bring national and international markets in competition with local businesses, which helped lower prices and increase competition.
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What were the 2 key issues in Chapter 19?
1) Deflation
2) Bank failures, runs and panics
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T/F: Unanticipated inflation can benefit lenders and harm borrowers.

Why?
False - Unanticipated deflation harms borrowers and benefits lenders.

This is because borrowers did not predict the deflation, so suddenly they have to pay back more money than they originally thought they would have to (b/c the interest and principle on the loan is now worth more).
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What did the Coinage Act of 1792 do?  What does 15:1 mean?
It established a "bimetallic standard" for US currency based on silver and gold.  They were printed in different weights to equal each other in value. 

15:1 is the original mint value of silver to gold.  The silver must be 15 times heavier than the gold to equal it in value. 
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Explain the Defacto Silver Standard.
Because the value of gold and silver changes over time, the market value hit 16:1 by 1834.  So silver is now worth a little bit less and gold a little bit more. 

Silver was the currency used by the populace because gold became more valuable on the market. So they hoarded gold and used silver. The over-valued metal at the mint will be used more in circulation. To be over-valued at the mint is to not be worth as much on the market.

Since both coins are supposed to be worth the same but the market differs, the cheaper of the two is used: silver.
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T/F: The undervalued metal at the mint will circulate as money.

Why?
False - the metal over-valued at the mint (silver) is circulated as money and the under-valued metal at the mint is hoarded (gold)

Why?

The under-valued metal is not given enough value at the mint (duh), but that means on the market it has more value.  So people hold on to gold like they would shares in a firm (as an investment) and spend the currency that isn't worth as much on the market.  That's why the Bimetallic standard was essentially a mono-metallic standard in practice.
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The                                 A                                     (3 words), in 1912, denounced the US banking system, listed 17 points of "                     B                      " (2 words) and called for the establishment of a central bank.  This ultimately led to the creation of the                               C                                  (2-3 words) in 1914.
A. National Monetary Commission

B. gross deficiency

C. Federal Reserve System
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T/F: In a fractional reserve banking system, commercial banks create money.
True
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National banks and State banks used to issue their own bank                 , which is just bank-created paper money.
notes
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Before the                       A                            (3 words) of 1863, the creation of National banks was unpopular.  Bank operations were still limited to a single state.  It was passed because Congress wanted to stimulate the sale of                    B                 (2-3 words) to help finance the Civil War and Conservative Congressmen wanted to decentralize control of the money supply and provide a uniform national             C             .
A. National Bank Act

B. US Treasury Bonds

C. currency
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Most importantly to the Federal Government, the National Bank Act of 1863 created legal tender national bank notes which had to be backed by $                 on every dollar in bank notes.
$1.10
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It was necessary that the national bank notes were            A        (2 words) and of                   B                   (2 words).
A. legal tender

B. uniform design
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What were the two reasons National banks were attractive to depositors?  Explain them briefly.
1. Legal reserve requirement - banks had to hold a certain amount of deposits in reserve.  This makes depositors more trusting and more willing to deposit.

2. Double liability on stocks - bank can lose double its money on investments it makes with your money, so it has twice the amount to pay you back with (I think this is what it means)
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The trend in the 1860s was (more/fewer) national banks and (more/fewer) state banks.  The trend starting in the 1880s was (more/fewer) national banks and (more/fewer) state banks. 
1860s
more National banks, fewer state banks

1880s
fewer national banks, more state banks
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After the state bank boom in the early 1880s, the government set a 10% tax on                A                  (1 word) notes replacing the previous 2% tax.  What effect did this have on State and National banks and their notes issued?  What was the intended and unintended consequence of raising the tax?  By 1900, were there more national or state banks?
A. state notes

The tax essentially prohibited SB notes.  Immediately after, state bank charters declined and national bank charters grew in number.

Intended: Increase the number of national bank charters which would increase the amount of money from Treasury bonds.

Unintended: Five years later in 1870s, SBs began to increase.  They found a way around bank notes (and the tax) with demand deposits (checking accounts).

By 1900, there were more state banks and also greater total assets in state banks.
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T/F: Demand deposits create money by collecting interest on money loaned out to borrowers rather than issuing bank notes.
True
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Bank notes and coins were replaced by                   in a demand deposit bank.
checks
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What three things does money do for you?  Explain each.
1) Medium of exchange - it is accepted for goods and services (most important)
2) Standard unit of account - prices are generally quoted in dollars and not goats or silly bands
3) Store of value - way of holding wealth (not the only way to hold wealth; can be in land, bonds, etc.)
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Loans are made by the creation of a                                            (2 words) in state banks after 1870.
checking account
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[Important, probably on test] In a fractional reserve system, banks create                    .
money
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From 1865 to 1890, National banks began to offer checking accounts because of decreasing                       A                     (2 words) on               B               (1-2 words).  The decrease in                      A                      made National banks less inclined to issue notes.
A. interest rates

B. US bonds
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Why was the banking system called a "Dual banking system" during Reunification?
Both National banks and State banks operated simultaneously.
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What were the five perceived problems with the Dual banking system? (don't explain)
1. No centralized control
2. Little ability to regulate money supply
3. Uneven distribution of banks/bank notes
4. Susceptibility to panics & runs
5. No Macroeconomic policy
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Explain the five perceived problems with the Dual banking system.

1) No centralized control
Basically there was no national banking system, just a bunch of other banking systems.

More specifically, there was no Lender of last resort or clearinghouse.  A Lender of last resort is someone who lends to a bank when it doesn't have enough money to pay out depositor's demands for their money back.  A clearinghouse is basically a place that clears balances between banks when they are all connected to one another.  Without one, each transaction/check has to be cleared individually with the banks involved.  So no clearinghouse means its difficult for banks to cash checks (for gold and silver).
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Explain the five perceived problems with the Dual banking system.

2) Little ability to regulate money supply
Especially so after the widespread use of demand deposits. 

Predictable seasonal changes in the demand of money impacted interest rates.  Farmers complained about increasing interest rates around harvest time. 

Now the Fed increases the money supply in certain times of the year to ease interest rate swings.
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Explain the five perceived problems with the Dual banking system.

3) Uneven distribution of banks/bank notes
There was limited credit in rural areas and the South.  For example:

In 1877, National bank circulation in...

...Rhode Island was $77 per capita
...Arizona was $0.13 per capita
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Explain the five perceived problems with the Dual banking system.

4) Susceptibility to panics & runs
The problem lay in "Country" banks and the call-loan market:

Call-loans are loans that can be called for repayment at any time

"Country" banks are world banks that held a lot of money in city banks.

The problem was that city banks loaned out "Country" banks' money at higher interest rates but city banks borrowed this money on call.  So if the "Country" bank experienced a run, it would call back the city banks' loans who would in turn call back loans it gave out.  Basically, the situation could domino easily.
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Explain the five perceived problems with the Dual banking system.

5) No Macroeconomic policy
    -Define QTM
    -Feed booms/starve recessions
Commercial banks "feed booms (1) and starve recessions(2)"

The Quantity Theory of Money (QTM) says MV=PY
M = money supply
V = velocity (how many times money exchanges hands in a year)
P = price level (GDP inflator is useful)
Y = Real output (how much stuff was created)

So... changes in M effect P and Y
Remember that PY=nominal GDP

1) Banks feed booms
A boom is when Y (real output) increases.  When that happens, M increases which then causes P to increase.  This causes inflation.  Countercyclical monetary policy was developed (not present during Reunification) to decrease M when Y is increasing to avoid inflation.  The Fed basically does the opposite of what the market would do to avoid inflation.

2) Banks starve recessions
Recession is a decrease in Y.  Banks lend less during recession, so M decreases.  To counter, the Fed decreases interest rates and expands M.  Like 1, the Fed didn't exist so this was a problem.
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During a boom, the Fed should...
decrease the growth rate of the money supply to avoid inflation.
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During a recession, the Fed should...
lower interest rates to expand the money supply.

or just expand the money supply
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A boom is a (increase/decrease) in Y.  A recession is a (increase/decrease) in Y.
boom: increase

recession: decrease
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The first bank reforms came in 1882 and 1890.  They made requirements for National bank                     more lenient.  What was this an attempt to do?
charters

It was an attempt to create a more uniform banking system.
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T/F: The Bank Panic of 1893 was a less severe, but long-term recession.
False - more severe, short term
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The Bank Panic and Depression of               (year) led to the widespread suspension of payments that lasted up to 2 months at some banks.  It led to cash shortages that turned into a depression. 
1907
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What two things did the Aldrich-Vreeland Act form?  Explain.
National Currency Associations
A group of 10 or more banks certified to be in "sound financial condition" could make emergency loans to banks experiencing runs or shortages.  These loans would be backed up against assets in the borrowing bank's portfolio.

National Monetary Commission
Commission to study the banking system and make recommendations.  It made these recommendations:
1. Create a central bank to hold bank reserves and act as lender of last resort
2. The Central bank should serve as fiscal agent for federal gov.
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The National Monetary Commission was created to study the US banking system and make recommendations.  What two recommendations did it suggest?

1) Create a                     A                 (2 words) to hold bank reserves and act as                                  B                             (4 words).

2) The Central bank should serve as fiscal agent for the                                   C                         (1-2 words).
A. central bank

B. lender of last resort

C. Federal government
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In 1913, the Federal Reserve was created.  It is a Central bank: a government created bank that...
holds a monopoly on the issuing of bank notes.
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The Fed was given a             A             charter that reduces political pressure on it.  This was different from the 1st and 2nd Banks of the US which only lasted      B    years and weren't truly Central banks.
A. permanent

B. 20 yrs
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The original structure of the Fed had a     A   member Board of Directors.  It had      B    district banks with 9 member boards. 

Of these 9 local directors,     C   were elected to represent the public.       D    could be bankers and the remaining   E      had to come from business, industry and agriculture.
A. 7

B. 12

C. 3

D. 3

E. 3
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T/F: Membership in the Fed was mandatory for Nation banks and State banks.
False - not mandatory for State banks
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T/F: The early Fed operated well as a clearinghouse for checks and notes.
True
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T/F: The early performance of the Fed overall was good.
False - poor performance in Macroeconomic policy and as lender of last resort
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What were the two requirements for a commercial bank to join the Federal Reserve?
1) Must purchase stock in the a Federal district bank

2) Must deposit cash reserves in the district bank
                                Why?  so Fed could serve as clearinghouse
Flashcard set info:
Author: savhighsmith
Main topic: Economics
Topic: History of Economics
School / Univ.: UGA
City: Athens
Published: 12.10.2010
Tags: Myra Moore Nick Huddleston NickHuddles.com
 
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