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PERFECT COMPETITION, REVENUE DIVISION: The marginal approach to analyzing a perfectly competitive firm's short-run profit maximizing production decision can be used to identify the division of total revenue among variable cost, fixed cost, and economic profit. The U-shaped cost curves used in this analysis provide all of the information needed on the cost side of the firm's decision. The demand curve facing the firm (which is also the firm's average revenue and marginal revenue curves) provides all of the information needed on the revenue side.

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Lesson 18: Banking | Unit 5: The Economy Page: 22 of 24

Topic: Benefits <=PAGE BACK | PAGE NEXT=>

Banks have two beneficial roles in the economy.

First: As financial intermediaries, banks match up savers and borrowers.

  • They are an effective means of diverting household income into investment expenditures for capital goods.
  • They are a vital link between the real and financial sides of the economy.

Second: As depository institutions, banks supervise a share of the nation's M1 money supply.

  • They have a big responsibility because money is critical to a complex, market-oriented economy.

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DISCOUNT RATE

The interest rate charged by the Federal Reserve System (the Fed) for loans to commercial banks, which in principle can be used as a means of a controlling the money supply. An increase in the money supply can be achieved when the Fed lowers the discount rate. A decrease in the money supply can be achieved when the Fed raises the discount rate. The discount rate, which is set by Federal Reserve Banks, subject to approval by the Board of Governors, is used more to signal changes in monetary policy rather than to actually control the money supply. The discount rate is one of the three monetary policy tools that the Fed can use, in principle, to control the money supply. The other two are open market operations and reserve requirements.

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Today, you are likely to spend a great deal of time looking for a downtown retail store seeking to buy either a coffee table shaped like the state of Florida or storage boxes for your summer clothes. Be on the lookout for high interest rates.
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The first "Black Friday" on record, a friday marked by a major financial catastrophe, occurred on September 24, 1869 -- A FRIDAY -- when an attempted cornering of the gold market induced a financial crises and economy-wide depression.
"The greatest barrier to success is the fear of failure."

-- Sven Goran Eriksson, writer

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