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My study guide for test 2

My study guide for test 2 - The Circuits of...

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The Circuits of Capital : (Understand the three circuits of capital and the relations between them) Money Circuit- Money-Commodities- Labor and means of production. How money is gathered to create a product. Production Circuit- M-C- (L and MP) -----Production -----Commodity. The actual production of the commodity and the finished product Commodity Circuit- M-C- (L and MP) ---P----C---- Money. The stage were you market and sell the commodity to make a profit. It’s a cycle necessary to continue business and all stages must be successful. QuickTimeª and a decompressor are needed to see this picture. Money Circuit: What is Money? Forms of Money: -Currency -Deposits -Credit Use of Money: -Means of payment -Unit of account -Store of value -Facilitates exchange Banks, credit and the creation of money -Banks hold money- deposits (liabilities) -Pay interest (interest 1) -Banks loan money- credit (assets) -Charge interest (interest 2) -Profits = Interest 2- Interest 1 The instability of banking -Fractional reserves: Banks are only required to keep a fraction of the amount of money they hold on hand -If all depositors were to want their money at the same time, banks wouldn’t be able to give it to them -Fractional Deposit Insurance Corporation: Ensures up to a certain of money that depositors have placed in the bank -Deflation: When banks are defaulted on by depositors - When a debtor has not met his or her legal obligations according to the debt contract
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-Confidence in the bank -Credit squeeze: Banks don’t lend out as much money Inflation: Causes: -Demand and economic expansion -Labor costs -Profits -Raw materials/Energy Losers: -Fixed income -Workers without cost of living adjustments -Bankers -The rich -Central banks: Independent (i.e. undemocratic) US Federal Reserve -Dual Mandate – inflation and full employment Interest rates -High interest rates slow down credit growth and economic activity -Low interest rates expand credit and economic activity -Neoliberal Monetary Policy -Fight inflation and forget full employment -Control money supply with interest rates to fight inflation Money Circuit: International Monetary Order -International gold standard: Gold as money. Every dollar was backed by gold -Bretton Woods Regime: 1944-1971 -Free trade, but national policy autonomy -Strict regulation on finance and global flows of capital -Dollar-gold standard -Post Bretton Woods Regime: -Globalization -Pure Dollar standard -Floating exchange rates: a currency's value is allowed to fluctuate according to the foreign exchange market -Increased power financial centers -Regional Money Unions- each region or country has own monetary system. Hence exchange rates (EU and the EURO).
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