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Chapter 25: Problem 2

Distinguish among money, income, and wealth. Which one of the three does the central bank of a country control?

Short Answer

Expert verified
The central bank controls the supply of 'money' in an economy but does not directly control 'income' or 'wealth'.

Step by step solution

01

Define Money, Income, and Wealth

To compare and contrast, it's essential to understand each term. Money refers to any medium that is universally accepted in an economy for the exchange of goods and services and the repayment of debts. Income is the economic flow that comes from work, investments, and other sources. It can be seen as the increase in economic resources that an individual or enterprise has during a period. Wealth, on the other hand, is the accumulation of resources. It's calculated by adding up all of one's assets (money, stocks, property, etc.) and then subtracting any liabilities or debts.
02

Discuss the role of a Central Bank

The central bank in a country is responsible for controlling the supply of money in the economy. They mediate the monetary policy, manage reserves, issue currency, and supervise the system's financial stability. Their tools for dealing with these responsibilities include open market operations, discount rates, and reserve requirements.
03

Identify which of money, income, or wealth the central bank controls

After comprehending the role of a central bank, it is clear that the central bank controls the supply of money. It does not have direct control over personal income or wealth of individuals and organizations. Instead, its influence on these relies on its policies towards economic growth and stability.

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Most popular questions from this chapter

In a column in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in \(1913,\) President Woodrow] Wilson had to retain the support of \(\ldots\) northeastern lawmakers while convincing southern and western Democrats that legislation would not \(\ldots\) create a [single] central bank. Wilson's ingenious solution was federalism." Explain what Congressman Brady meant when he stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act.

(Related to the Apply the Concept on page 890) During the German hyperinflation of the \(1920 \mathrm{~s}\), many households and firms in Germany were hurt economically. Do you think any groups in Germany benefited from the hyperinflation? Briefly explain.

An article in the Wall Street Journal noted that online peer-to-peer lenders "have automated the processes of checking borrowers' credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns." The article also noted, "Charge-off rates, which reflect loans on which a lender doesn't expect to collect, have risen." a. Why do banks require borrowers to submit pay stubs and tax returns when applying for a loan? Why would online lenders skip this step in the loan application process? b. If online lenders find that borrowers are defaulting on loans at higher- than-expected rates, can they offset the problem by charging higher interest rates on the loans? Briefly explain.

An article in the American Free Press quoted Professor Peter Spencer of York University in England as saying, "This printing of money 'will keep the [deflation] wolf from the door." The same article quoted Ambrose Evans- Pritchard, a writer for the London-based newspaper The Telegraph, as saying, "Deflation has ... insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." a. What is price deflation? b. What does Spencer mean by the statement "This printing of money 'will keep the [deflation] wolf from the door'"? c. Why would deflation cause "shoppers to hold back," and what does Evans- Pritchard mean by saying "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?

An article in the New York Times stated that "income is only one way of measuring wealth." Do you agree that income is a way of measuring wealth?
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