final exam review. unit i: supply & demand demand- the desire for a product and the ability to...
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FINAL EXAM REVIEW
UNIT I: SUPPLY & DEMAND
Demand-
the desire for a product and the ability to pay for it
Law of Demand-
states that as prices decrease, the quantity demanded increases; and when price increases, the quantity demanded decreases
Price
Properties of Demand Curves
Movement Along– Occurs when prices go up & down
Shift in the Curve– Occurs when there is change in something other
than price
Shift in Demand Video
http://www.youtube.com/watch?v=8E0SoagJCx4
What is Elasticity?
How sensitive you are to a change in price
What is the general rule on elasticity?• The more substitutes there are, the
more elastic you are
Factors that Determine Elasticity
• Are there good substitutes?– Yes = elastic No = inelastic
• What proportion of income does it use?– Large = elastic Small = inelastic
• Is it a necessity or a luxury?– Luxury = elastic Necessity = inelastic
Elastic vs Inelastic Demand Curves
Book animation pg. 118
www.classzone.com
Factors that shift demand curves
Complementary goods– Goods used with another good
Substitute goods• Goods used instead of another good
Why does this happen?
Substitution Effect– As prices increase, people buy other similar goods
Income Effect• As prices increase, you can’t buy as much
Factors that will shift the demand curve left or “in”
People buy less at each price!!1.Decrease in income2.Price of substitute falls3.Price of compliment increases4.Poor product expectations5.Expect price to fall
Shift the demand curve right or “out” are exactly the opposite!
People will BUY MORE at each price!!1.Increase in income2.Price of substitute rises3.Price of compliment decreases4.Good product expectations5.Expect the price to remain the same/increase
Surplus v. shortage
Surplus–Supply is greater than demand
Shortage–Demand is greater than supply
Law of Supply
The supply model is used to try and predict the behavior of suppliers in a given market. It shows the amount a producer is willing to put on the shelf at each given price!!
As price goes up, business will supply more
Properties of Supply Curves
Movement along occurs when there is a change in price
A shift in the curve occurs when there is change in something other than price.
Factors that shift supply curves left or “in”
1. A decrease in producers2. A decrease in technology3. An increase in input cost4. An increase in the price of a related output
Fixed Costs
• Expenses that the owner of a business must incur whether they produce nothing, a little, or a lot.
THEY ARE CONSTANT
Variable Costs
• Business costs that vary as the level of production output changes
CHANGE AT EACH QUANTITY
Total Costs:FC + VC = TC
What is market equilibrium?
What is equilibrium price?
OCCURS WHEN QUANTITY DEMANDED AT A PARTICULAR PRICE = QUANTITY SUPPLIED
AT THAT PRICE
PLACE WHERE THE MARKET IS IN BALANCE; PRICE AT WHICH QUANTITY DEMANDED =
QUANTITY SUPPLIED
Quantity T-shirts
0
4
8
12
16
20
24
4 8
Pric
e pe
r T
-shi
rt
12 16 20
Therefore, my
equilibrium price is
roughly $15 because that is where my
curves intersect.
Elastic & Inelastic Curves
InelasticDemand
InelasticSupply
ElasticSupply
ElasticDemand
Supply & Demand Practice
$1
$2
$3
$4
$5
200 600400 800 1000
S1 S2
D1 D2
In the following questions, determine if the supply curve will Shift In (SI), Shift Out (SO) or Move Along the Curve (M).
_____ 14. What will happen to the supply curve for iPads if Apple lowers the selling price of them?
_____ 15. What will happen to the supply curve for automobiles if Nissan was to leave the auto industry?
_____ 16. What will happen to the supply curve if Nintendo predicts it will sell the Wii at a lower price?
_____ 17. What will happen to the supply curve for solar panels if the federal government rejects a subsidy to help pay for the costs?
_____ 18. What will happen to the supply curve for pizza if Edies raises the prices of its pizzas?
_____ 19. What will happen to the supply curve if Moog workers become more efficient?
M
SI
SO
M
SO
M
$10
$15
$20
$25
$30
200 600400 800 1000
$5
1200
S2S1
In the following questions, determine if the demand curve will Shift In (SI), Shift Out (SO) or Move Along the Curve (M).
____ 22. What will happen to the demand curve for IBM if they lower the price of their PC’s?____ 23. What will happen to the demand curve for bottled water if there is a hot week forecasted?____ 24. What will happen to the demand curve for chocolate the week leading up to Valentine’s
Day?____ 25. What will happen to the demand curve for
Sabres Jerseys at the beginning of the NHL Season?
M
SO
SO
SO
$1
$2
$3
$4
$5
200 600400 800 1000 1200
D1D2
ELASTIC V. INELASTIC
1. Elastic 2. Inelastic
____ 28. Water____ 29. Salt ____ 30. Coffee ____ 31. Chocolate
2211
UNIT II: SCARCITY
MICROECONOMICSTHE STUDY OF THE BEHAVIOR
OF INDIVIDUAL PLAYERS-SUCH AS INDIVIDUALS,
FAMILIES, AND BUSINESSES-IN AN ECONOMY
MACROECONOMICS
THE STUDY OF THE BEHAVIOR OF THE
ECONOMY AS A WHOLE; CONCERNED WITH THE
LARGE SCALE ECONOMY
FACTORS OF PRODUCTION
LAND-
EVERYTHING THAT COMES FROM THE
EARTH FOR PRODUCTION
Ex.)
OIL, LUMBER, WATER, ETC.
This is NOT rent o
r
land for b
uilding a
factory!!
LABOR-HUMAN EFFORT, TIME & TALENT IN PRODUCING GOODS & SERVICES
Ex.) DOCTORS, FACTORY WORKERS, ETC.
CAPITAL
RESOURCES MADE & USED BY PEOPLE TO
PRODUCE & DIST. GOODS
Ex.)FACTORIES, MACHINES, ETC.
ENTREPRENEURSHIP
VISION, SKILL, INGENUITY,
WILLINGNESS TO TAKE RISKS, NEEDED TO START & RUN A
NEW BUSINESSEx.) ANYONE WHO STARTS A
BUSINESS
PRODUCER•PERSON WHO MAKES GOODS OR PROVIDES
SERVICES
CONSUMER•PERSON WHO
BUYS GOODS AND SERVICES
ECONOMIST•PERSON WHO STUDIES,
DEVELOPS, AND APPLIES THEORIES OF ECONOMIC BEHAVIOR
ANOTHER TERM FOR PPC IS
PRODUCTION POSSIBLITY FRONTIER
What does the PPF represent?
• How much of a good can be produced• The greatest combination of 2 goods• The limits of your industry
15
10
5
0 20 40 60 80 100
A
B
C
CAKES
COOKIES
PRODUCTION IMPOSSIBILITY
UNDERUTILIZATION
EFFICIENCY
WHAT IS UNDERUTILIZATION?
ECONOMIC RESOURCES ARE NOT BEING USED TO THEIR
FULL POTENTIAL, RESULTING IN FEWER GOODS AND
SERVICES
WHAT IS EFFICIENCY?
• ECONOMIC RESOURCES ARE USED TO PRODUCE
THE MAXIMUM AMOUNT OF GOODS AND SERVICES
WHAT IS PRODUCTION IMPOSSIBILITY?
• ANY POINT OUTSIDE OF THE CURVE THAT CANNOT
BE ACHIEVED
Opportunity Costs:
As production switches from one product to another, more resources are required to increase the production of the second product; therefore, you are giving up
some production of product one
WHAT ARE YOU GIVING UP?
GUNS vs. BUTTER(in millions)
15
10
5
0 20 40 60 80 100
A
B
C
GUNSS
BUTTER
What is the opportunity cost of increasing gun production from 7 to 11 million?
27 million sticks of butter
What is the opportunity cost of increasing butter production from 20 to 80 million?
8 million guns
SCARCITY• A SITUATION THAT EXISTS
WHEN THERE ARE NOT ENOUGH RESOURCES TO
MEET HUMAN WANTS
THREE ECONOMIC
QUESTIONS:1. WHAT WILL BE
PRODUCED?2. HOW WILL IT BE
PRODUCED?3. FOR WHOM WILL IT BE
PRODUCED?
FISH OIL
BRITAIN 4 tons 12
NORWAY 2 tons 4
2. Jk3. Jk
30
20
10
wheat
soybeans
B
A
1.Underutilization – not maximizing their resources
2. 0
Shipping Method Delivery Charge
Standard shipping
3-7 days $3.99
Second-day air 2 business days $8.98
Next-day air 1 business day $13.98
3. Having it right away
UNIT III: LABOR & UNEMPLOYMENT
UNEMPLOYMENT RATE:
The percentage of the labor force that is jobless and actively looking for work
The US Bureau of Labor Statistics surveys 60,000 households each month to determine this number.
Our current unemployment rate:
8.2%Highest unemployment rate during the Great Depression:
25%http://www.youtube.com/watch?v=vuMiwRDGqCU&feature=related
What two qualifications must a person have to considered unemployed? (16+
years old)?
1. NOT WORKING, BUT ARE ABLE TO WORK
2. HAVE LOOKED FOR WORK SOMETIME IN THE PREVIOUS FOUR WEEKS
TYPES OF UNEMPLOYMENT
Frictionally Unemployed-THE TEMPORARY UNEMPLOYMENT OF
WORKERS MOVING FROM ONE JOB TO ANOTHER
Structurally Unemployed-UNEMPLOYMENT THAT EXISTS WHEN THE
AVAILABLEJOBS DO NOT MATCH THE SKILLS OF AVAILABLE WORKERS
Cyclical Unemployment-• UNEMPLOYMENT CAUSED BY THE
PART OF THE BUSINESS CYCLE WITH DECREASED ECONOMIC ACTIVITY
Seasonal Unemployment-• UNEMPLOYMENT LINKED TO
SEASONAL WORK
UNDEREMPLOYMENT:People employed part-time who want to work full-
time, or those who work at a job below their skill level
FULL EMPLOYMENT:No unemployment due to decreased economic activity
http://www.pbs.org/newshour/video/module.html?mod=0&pkg=2072009&seg=5
LABOR UNIONAn organization of workers who collectively seek to improve wages, working conditions, benefits, job security, and other work-related matters; Labor unions began in the late 1800’s
due to working conditions in factories.
WAGES• payments workers receive in return for work
Minimum wage•the lowest amount established by law, an employer may pay a worker for one hour of work
The price for labor is dictated by the laws of supply and demand.
Equilibrium wage:the wage at which the quantity of workers demanded equals the quantity of workers
supplied
Poverty:having little or no money,
goods, or means of support
Living wage:minimum income necessary for a worker to meet basic needs
to live in a specific area
U3: Official Unemployment Rate
People without any kind of job who have been actively looking for work within the last month
7 – 8%
FORMULA: Unemployment Rate = number unemployed U.S. labor force
*To be included in the labor force you must be considered
employed or unemployed!*
Directions: For each of the following, indicate whether the group would be classified as Employed (E), Unemployed (U), or not counted (NC). Wharton, TX has a population of 9,000. Of that 9,000:
36. ________ a. 6,000 work as paid employees.
37. ________ b. 1,100 are unemployed, but are looking for work.
38. ________ c. 1,400 are unemployed and have given up looking for work.
39. ________ d. 450 are retired and go fishing daily.
40. ________ e. 50 quit their jobs last year to go back to college.
Now, calculate the following:
________ 41. How many people would be included in the workforce?
________ 42. What is the unemployment rate for Wharton, TX? ________ 43. How many people from above would be considered
discouraged workers?
E
UNC
NC
NC
7,100
1,40015.1%
UNIT IV: ECONOMIC SYSTEMS
Traditional Economy
• Where families, clans, or tribes make economic decisions based on customs & beliefs that have been handed down from generation to generation
• Goal is survival• Everyone has a set role• Men are hunters & herders• Women cook, tend crops, raise children• Youngest help parents & learn skills• Good of group/society is greater than individual
Traditional EconomyPROS: CONS:
• Clearly answers the 3 economic questions
•Little disagreement over economic goals & roles
• They resist change b/c they are based on tradition & custom
•Prevent people from doing what they want
•Lower standard of living
COMMAND• A system where society’s leaders, usually central
government make all economic decisions; called a CENTRALLY PLANNED ECONOMY
Ex.) North Korea
Kim Jong un
Ex.) Cuba
Fidel Castro; Raul Castro
Market Economy
• Based on supply and demand, not government directives
• Consumers drive the economy• Producers decide what goods/services they
will offer
Fundamentals of a Market
Economy
Private Property
Consumer Sovereignty
Specialization
Profit
Competition
Voluntary Exchange
Government Involvement
Mixed Economy:Elements of the three different economic systems in one economy; the most common economic system
Ex.) USMarket-business competition, private property, profit
Command-government regulated agencies, schools, USPS
Traditional-schools still follow an agricultural schedule
Profit
• A financial gain from a business transaction• Sellers are free to attempt to maximize their
profits
an economic system based on
CAPITALISM
PRIVATE OWNERSHIP OF THE FACTORS OF PRODUCTION.
In a Communist economic system, the ____________________ owns
the means of production.
Workers get their ________________ from
the state, which tend to be low because the state is
not worried about making a _________________, just ensuring the basic needs of
its people
The government sets the prices of
___________________. They typically set them _________ so that the
masses can afford them.
GOVERNMENT
WAGES
PROFIT
GOODS & SERVICES
LOW
Due to _________ wages and getting paid regardless of
worker _________________________,
there is little _______________________ to
work hard.
Due to low prices of goods and services and low worker
productivity, ______________ of
goods/services tend to low, therefore resulting in
_______________________.
LOW
PRODUCTIVITY
INCENTIVE
SUPPLY
SHORTAGES
Also, due to _________ wages, there is little incentive for
people to go on to ________________ for
advanced degrees. This leads to a shortage of
________________, ______________,
_______________, etc.
These shortages contribute to human suffering. There
is a shortage of ___________,
___________________, toiletries, etc.
LOW
COLLEGE
DOCTORS
LAWYERSTEACHERS
FOOD
MEDICINE
Adam Smith vs. Karl Marx
Capitalism
1723 – 1790
The Wealth of Nations
Laying the foundation for modern economics
Alexander Hamilton, Karl Marx; Defenders/critics of capitalism
Nation would be wealthier w/free trade; “Invisible hand guides the market place”
Communism/Socialism
1818 – 1883
The Communist Manifesto (1848)Das Kapital
Laid the foundation for socialist economic theory
Russian Rev. 1917; Chinese Rev. 1949
Tension between worker & owner would lead to revolt & create a new classless society ; “Onion Theory”;
CIRCULAR FLOW MODEL
FACTOR MARKETMARKET IN WHICH THE
FACTORS OF PRODUCTION ARE
BOUGHT AND SOLD
PRODUCT MARKETMARKET IN WHICH
GOODS AND SERVICES ARE BOUGHT AND SOLD
SHORTAGE
NOT HAVING ENOUGH OF A PRODUCT TO MEET THE
DEMAND FOR THE PRODUCT;
OFTEN THE RESULT OF PRICES BEING SET TOO LOW
Scarcity vs. Shortage
Scarcity means something is rare and hard to come by
Shortage is an item may be popular and easy to come by, but occasionally supply does not meet demand
PRIVATIZATION•THE PROCESS OF
TRANSFERRING STATE-OWNED PROPERTY AND
BUSINESSES TO INDIVIDUALS
NATIONALIZATION• THE PROCESS OF
TRANSFERRING PRIVATE OWNERSHIP TO PUBLIC
OR GOVERNMENT OWNERSHIP
UNIT V: MARKET STRUCTURE
SOLE PROPRIETORSHIP-
A BUSINESS OWNED AND CONTROLLED BY ONE PERSON
PARTNERSHIP
A BUSINESS CO-OWNED AND CONTROLLED BY TWO OR MORE PEOPLE
CORPORATION
A BUSINESS OWNED BY SHAREHOLDERS (STOCKS)
Sole ProprietorshipsAdvantages
• Easy to open and close
• Few regulations• Freedom and
control• Owner keeps Profit
Disadvantages
• Limited funds• Limited life• Unlimited
liability
PartnershipsAdvantages
• Easy to open and close
• Few regulations• Access to resources
• Joint Decision Making
• Specialization
Disadvantages
• Potential for conflict
• Limited life• Unlimited
liability
CorporationsAdvantages
• Access to Resources
• Professional Managers
• Limited Liability• Unlimited Life
Disadvantages• Start-Up Cost
and Effort• Heavy Regulation
• Double Taxation• Loss of Control
Franchise: a business made up of semi-independent businesses that all offer the same product or services
Vertical Merger
• When firms involved in different steps of manufacturing come together
Horizontal Merger
• Two or more firms that produce the same kind of product
Conglomerate
• A firm that has at least 4 businesses, each making unrelated products
GE
Multinational
• A large corporation with branches in several countries
UNIT VI: THE SEVEN BILLION
Human Development Index (HDI) – combination of a nation’s real GDP per capita, life expectancy, adult literacy rate and student enrollment figures
GDP per Capita-A nation’s overall GDP divided by population
Ex. GDP of the US is over $40,000 (among the highest)GDP of Tanzania (E. Africa) is $700 (among the
lowest)
What is GDP?
The market value of all final goods & services produced within a nation’s borders in a given time period (often used annually)
Measures 2 things at once:1.Total income of everyone in the economy2.Total expenditure on the economy’s output
of goods
3. What is not counted?
a. Intermediate productsb. Buying used goods c. Not produced in U.S.d. Off-market transactionse. Black Market
Calculating GDP1. Consumption2. Investment3. Government spending4. Net exports
Formula: C+I+G+X= GDP= AD
• Literacy Rate – the percentage of people over 15 that can read or write
Ex. Japan – 99%; Somalia’s – 38% (NE Africa)
2) HEALTH-
• Life Expectancy – the average number of years a person could expect to live Ex. Japan 82; Angola 39
• Infant Mortality Rate – the number of children who die within the first year of life per 1,000 live birthsEx. Japan 3; Angola 185 (SW Africa)
ECONOMIC STRATEGIES:
EDUCATIONCREATING A FULL CURRICULUM WHICH IS MANDATORY FOR ALL CHILDREN UP TO A CERTAIN AGE
WILL INCREASE WHAT THE LABOR FORCE IS CAPABLE OF DOWN THE
ROAD
BUSINESS INVESTMENTSENCOURAGING FOREIGN
COMPANIES TO INVEST IN A COUNTRY INCREASES THE LABOR FORCE NEEDED AND PUTS MORE
MONEY INTO THE ECONOMY
BORROW FROM WORLD BANK
THE WORLD BANK ALLOWS LDC’S TO BORROW FROM
THEM AT A VERY LOW INTEREST AND WITH EXTRA
TIME TO PAY BACK THE DEBT
BUILD INFRASTRUCTUREBUILDING ROADS, SCHOOLS, POWER STATIONS, BRIDGES INCREASE THE
ABILITY OF THE COUNTRY TO SHIP GOODS AND PROVIDE SERVICES TO ITS PEOPLE
AND ANY COMPANY INTERESTED IN DOING BUSINESS/INVESTING IN A
COUNTRY
GOVERNMENT SPENDING
THIS INCREASES THE AMOUNT OF CAPITAL IN CIRCULATION WHICH
CAUSES AN INCREASE IN DEMAND; OFTEN RESULTING IN
MORE JOBS
MICROLOANSSMALL LOANS, USUALLY UNDER
$5,000 THAT AVERAGE PEOPLE LEND TO INDIVIDUALS IN LDC OR
TRANSITIONING ECONOMIES SO THEY CAN GET THEIR BUSINESS OFF
THE GROUND. THE PERSON GETTING THE LOAN PAYS IT BACK IN
MONTHLY PAYMENTS AT A LOW INTEREST
IMF (International Monetary Fund)The International Monetary Fund (IMF) is
an organization of 187 countries, working for global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty around the world; countries pay into the IMF and can
borrow money at low rates; IMF works for fair loans & loan terms for LDC’s.
UN Development ProgramUNDP is the United Nations' global development
network, an organization advocating for change and connecting countries to
knowledge, experience and resources to help people build a better life. They are on the
ground in 177 countries, working with them on their own solutions to global and national development challenges. When faced with issues of globalization, countries turn to the
UNDP to bring in experts to work with governments on problem-solving.
UNIT VII: FISCAL POLICY & BANKING
INFLATION
SUSTAINED RISE IN GENERAL PRICE LEVEL, OR THE
SUSTAINED FALL IN THE PURCHASING POWER OF
MONEY
What is a business cycle?A SERIES OF PERIODS OF EXPANDING AND CONTRACTING ECONOMIC ACTIVITY
How is the business cycle measured?AN INCREASE OR DECREASE IN REAL GDP
A. EXPANSION PHASE-REAL GDP GROWS RAPIDLY
B. THE PEAK-GDP REACHES HIGHEST
POINTC. CONTRACTION
PHASE-REAL GDP DECLINES
D. THE TROUGH-MARKS THE END
OF CONTRACTION
The expansion stage of the business cycle is a period of
ECONOMIC GROWTH, or an increase in the GDP. JOBS are usually easy to find so UNEMPLOYMENT goes down.
More RESOURCES are needed to keep up with spending DEMAND. The PEAK is the point at which GDP is the highest. As prices RISE and RESOURCES tighten, businesses become less PRODUCTIVE.
After the peak begins the CONTRACTION phase. What happens during this phase?
THIS IS THE POINT OF THE BUSINESS CYCLE WHERE REAL GDP FALLS AND PRODUCERS CUT BACK
The final phase is TROUGH. This is the point where both REAL GDP and EMPLOYMENT stop declining. The cycle is done when:IT HAS GONE THROUGH ALL FOUR PHASES
DEMAND-SIDE ECONOMICS:
FISCAL POLICY TO STIMULATE AGGREGATE DEMAND– KEYNESIAN
ECONOMICS
What was Keynes first
revolutionary idea?
He defined AGGREGATE DEMAND as the sum of all
demand in the economy
Laffer Curve
Illustrates how tax cuts affect tax revenues and economic growth.Tax revenues increase as tax rates increase to a certain point.
After that point, higher taxes actually lead to decrease tax revenue.WHY?
Too high of taxes could actually discourage people from working, investing, and
spending.
AUTOMATIC STABILIZERS:Features of fiscal policy that work automatically to stabilize the economy
PUBLIC TRANSFER PAYMENTSUnemployment compensation, food stamps, welfare, etc.; when people receive these benefits, they gain income to spend so that recession is less severe on the individual/family. In a weak economy, more people qualify for these benefits; in a strong economy, less qualify
DISCRETIONARY FISCAL POLICY:
Actions taken by the government by choice to correct economic instability; Congress must enact legislation in order for these policies to be implemented. (Similar to discretionary spending)
EXPANSIONARY FISCAL POLICY:Plan to increase aggregate demand and stimulate a weak economy
CONTRACTIONARY FISCAL POLICY:
Plan to reduce aggregate demand and slow down an inflationary (too-rapidly expanding) economy
SUPPLY-SIDE
Cut corporate taxes
Lower production costs
More $ for hiring workers
More supply is made
But, more people have $ to spend
and demand goes up
Businesses make $ due to increased
demand
What is a balanced budget?WHEN A GOVERNMENT SPENDS WHAT THEY TAKE IN IN TAXES
What is deficit spending?WHEN A GOVERNMENT SPENDS MORE THAN IT COLLECTS IN A SPECIFIC BUDGET YEAR
What is national debt?THE DEFICIT SPENDING THAT ACCUMULATES FROM YEAR TO YEAR
1. Portable2. Divisible3. Durable4. Uniform
Physical Characteristics of Money
How does the Federal reserve system
operate?• It’s main function is to control the
money supply through monetary policy
• The power of the Fed has grown to the point where its decisions have enormous impact on the economy.
The Reserve Requirement: The Fed’s most powerful
tool• A fraction of the bank’s deposits that must be kept in reserve by the bank to control the amount the bank can lend
• Usually vary between 3% & 14% of total deposits.
• CONTROLLING THE MONEY SUPPLY:Increase supply = LOWERS RRDecrease supply = RAISES RR
The Discount Rate: The Fed acts as a lender to banks
• Interest the Fed charges when it lends money to banks
• When the prime rate or discount rate changes, all INTEREST rates will change.
• CONTROLLING THE MONEY SUPPLY:Increase supply = LOWERS DRDecrease supply = RAISES DR
The Federal Open Market Operations: The Fed’s most important & most frequently
used tool• to adjust the money supply• The Fed is the nation’s owner of
SECURITIES (bonds, Treasury bills, Treasury notes)
• CONTROLLING THE MONEY SUPPLY:Increase supply = BUYS securitiesDecrease supply = SELLS securities
The Federal reserve constantly monitors
• the money supply• It will increase or decrease the money
supply by increasing or decreasing interest rates.
• The ECONOMY reacts to decisions by the FEDERAL RESERVE