What is the biggest impact on the cost of borrowing money?
interest rate
Market interest rates represent the current cost of _______, which is controlled by the law of _______ and _______.
-money
-supple and demand
If the supply of money is large, interest rates tend to ______. If supply tightens, interest rates tend to _____.
fall
-rise
What two ways does the federal government influence the cost to borrow?
-fiscal policy; government's actions in raising revenue (mainly through taxation), spending money, and managing its debt.
-Monetary policy; government's direct efforts to control the money supply and the cost of money
What is the government's largest source of income?
taxes
Who is in charge of the fiscal policy?
-executive branch and legislative branch
What is the U.S. Treasury Department in charge of?
-carrying out the fiscal policy; managing the federal government's finances and national debt; secretary of President and congress decisions
Federal deficit
federal government spends more than it takes in
How does the Treasury try to fix a federal deficit and what is the outcome of this action?
-Treasury obtains funds to cover the shortfall by issuing interest-bearing securities for sale to investors; Treasury Bills (1 or less yrs), Treasury Notes (2-10yrs), Treasury inflation-protection securities (5-30yrs), or Treasury bonds (20-30yrs).
Money used for federal deficit is borrowed from ______, and makes less money available for _______.
-private sector
-private borrowers
When taxes are high, taxpayers have less money to lend or invest, and tend to prefer what kind of investments?
-tax-free; they stay away from real estate
How does the government encourage homeownership?
-by offering tax exemptions, deductions, and exclusions
What kind of tax deductions are there for owning a home and what are the limits of the deductions
-deduct interest paid from taxable income; limits: deduct interest paid on loans for buying, building, or improving first and second residences, as long as the loans DON'T add up to more than $1,000,000 ($500,000 for married taxpayer filing separately)
-deduct interest paid on any loans used to purchase the property as a business expense
-other limits: equity up to $100,000 on home loan
-Exclusion of gain on sale of principal residence; if a taxpayer makes more than $250,000 (single) or $500,000 (married) on a sale of their residence, the excess is taxed.
To qualify for the exclusion on gain of sale, the taxpayer must have both owned and used the property as a principal residence for at least _____ years during the ______ year period before its sale.
2, 5
-taxpayers can claim a reduction exclusion for less than two years in special circumstances such as change of location due to illness or job.
If the sellers are married and filing a joint return, only one spouse has to meet the ownership test for the eligibility for the exclusion on gain of sale, but both spouses must meet the use test. If only one spouse meets both the ownership test and the use test, the maximum exclusion the couple can claim is ________.
$250,000
-can be up to $500,000 if both passed
Depreciation deductions for investors
-owners of income property (rentals), are allowed to take depreciation deductions: cost of buildings and other property improvements, repairs.
-residential property 27 and a half years, rather than deducted all at once
Monetary Policy is set and implemented by?
the Federal Reserve System (the Fed)
Monetary Policy
government's efforts to control the money supply to keep the national economy running smoothly.
The Federal Reserve System regulates ___________, and its responsibility for monetary policy grew out of that function
-commercial banks
In 1863, Congress passed the ___________, which established basic banking regulations and procedures for supervising commercial banks.
National Bank Act; even with this act enacted, problems still persisted with bank money regulation.
What is the history in building the Federal Reserve System and why was it established?
-Federal Reserve was established to strengthen the financial system and improve public confidence in banks
-In the Federal Reserve Acts of 1913-1916, Congress created the Federal Reserve System, which would monitor commercial banks by performing periodic bank examinations, and impose reserve requirements (money banks have to have in reserve, available for immediate withdrawal).
-the Federal Reserve also serves as a "lender of last resort," providing short-term backup loans to banks that ran low on funds.
The Federal Reserve solve the problem of financial panics and bank runs completely.
-false, during the Depression of the 1930s, the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation were created as part of the New Deal.
How is the Federal Reserve organized
-power spread in three different ways; geographically, between private and government sectors, and among bankers, businesses, and the public.
-these three systems include: 12 regional Federal Reserve Banks in 12 Federal Reserve Districts (geographically), the Federal Reserve Board (7 members that control the system, appointed by president and confirmed by Senate for 14 yr terms), the Federal Open Market Committee, several advisory councils, and over 3,000 member banks.
Who controls the Fed's monetary policy?
-the 7 members of the Board of Governors
How many members are in the board of directors for each Federal Reserve Bank?
9
The economy is considered healthy when there is sustainable economic growth with with three characteristics?
-low unemployment
-stable prices
-reasonable interest rates
If growth is too strong and too fast, it's usually accompanied by _________, a trend of general price increases throughout the economy.
inflation
It is good if the economy was growing strong and fast.
-false, causes inflation; better for the economy to grow at a steady pace
The Fed relies on three main tools to implement its monetary policy and influence the economy, what are they?
Which tool is the primary method for controlling the money supply?
-reserve requirements
-interest rates (the discount rate and federal fund rate)
-open market operations** primary control for money supply
What are reserve requirements?
-the percentage of its deposits the bank is required to maintain on reserve; requirement amount is set by the Federal Reserve Bank. The Fed also sets reserve requirements on savings banks, savings and loans, and credit unions.
The federal reserve requirements and interest rates ________, to decrease funds available for investment. The reserve requirements and interest rates _________ to increase supply of funds.
-increase
-decrease
What two types of interest rate does the Fed have control over?
-discount rate; interest rate charged banks that borrow from the Fed
-federal funds rate; interest rate banks charge each other for overnight loans (bank borrows money from another bank to meet its reserve requirements); Fed does not set the rate for federal fund rate, but sets a target rate.
When the Fed raises or lowers the discount rate or the target for the federal funds rate, it's regarded as...
