Economics - Economics 1.....

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Economics 1. The government runs a deficit whenever it spends more than it takes in. This can be good for the economy by creating  jobs, but it can hard the economy if it drives up interest rates. High interest rates "crowd out" private investment, as  businesses cannot afford loans at the higher interest rates. Thirdly, government spending can create inflation if the economy  is nearing capacity. Consumers can benefit from the increase in economic activity, which creates jobs. However they may be  negatively affected by inflation, especially if they are retired and not seeking work.  2. The effect of unions varies depending on the situation. When workers are underpaid due to a monopoly of the labor  market, unions can help by giving workers a fair share of the profits. This spurs economic growth as workers are also  consumers. However, if unions insist on many perks or higher wages than the employer can afford, they can harm the  economy by driving employers out of business, or cause them to them to offshore.  3. Borrowers drive the demand for loanable funds, while lenders drive the supply. Banks generate loanable funds through  the reserve ratio. Essentially, they can loan out a certain percentage of each dollar deposited with them. When interest rates  are high, deposits at banks increase and there is a large supply of loanable funds. However, few borrowers can afford the  high interest rates, so demand falls.  4.What are the prime rate, the discount rate, and the federal funds rate? Who controls these rates? What would you expect  to happen in the general economy if these rates are all increased? Decreased? Use examples from your text, the South  University Online Library, or from the Internet when responding to these questions.  The prime rate is the interest rate that banks offer to borrowers and is based on the demand  for loans. The discount rate is  the interest rate that the Fed charges banks when it loans them funds. 
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