FINAL EXAM REVIEW. UNIT I: SUPPLY & DEMAND Demand- the desire for a product and the ability to...

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