Economics, Part 10
Question 1: Describe credit unions.
Answer 1: A credit union is a financial institution that is owned and operated by its members. Credit unions are different from other institutions because those who have accounts with them are considered owners. Members elect a board of governors which governs policies on interest rates and similar matters. Only members are allowed to deposit money in or borrow money from the credit union.Credit unions usually pay higher interest on deposits and charge lower interest on loans than banks. However, to maintain capital and solvency, they must receive more money from loans than they spend on dividends. Also, because of their status as non-profit financial institutions, they are exempt from federal and state income taxes.
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Question 2: Explain the role of the Federal Reserve.
Answer 2: According to the Board of Governors of the Federal Reserve System, the role of the Reserve is to perform four main tasks:Conduct the country’s monetary policy by influencing conditions so as to obtain high employment rates, stable prices, and moderate interest rates.Supervise and regulate banking and credit institutions to protect the rights of the consumers and provide a safe and secure financial system for the nation.Maintain the economy’s stability and control the risk that occurs in financial markets.Play a large role in America’s payment system and give its services to the U.S. government and to foreign financial institutions.
Question 3: Explain the argument between active and passive stabilization policies.
Answer 3: There is disagreement among economists regarding the government using its policies to stabilize the economy. Opinions differ on whether the policy should be active or passive.Many economists argue that the need for active government policy is obvious. Recessions result in low incomes, unemployment, and economic hardship. The model of aggregate supply and demand shows that shocks to the economy cause recessions and that policy can prevent recessions by responding to those shocks. Therefore, why wouldn’t the government use policy for stabilization?Other economists argue that the government should use a passive approach. They believe in a passive policy because an active policy can lead to lags, time inconsistency problems, and political business cycles.
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