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January 18, 2018 

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FEDERAL RESERVE DEPOSITS: Deposits that commercial banks keep with the Federal Reserve System. Federal Reserve deposits, together with vault cash are the bank reserves that banks use to back up customers' deposits and otherwise conduct daily transactions, such as processing checks and satisfying customers cash withdrawals. Federal Reserve deposits play three key roles in the banking system. One, they are used by the Federal Reserve system to process of clear checks. Two, they are loaned between commercial banks through the federal funds market. Three, they are used by the Federal Reserve System to control the money supply.

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NORMATIVE ECONOMICS:

The branch of economics that seeks to recommend the way the economy should operate. It is the policy side of economics that is based on individual preferences and cannot be proven either right or wrong. A normative economic statement cannot be refuted by looking at the real world--that is, by testing hypotheses.
Normative economics depends on values, beliefs, preferences, self interests, and/or the pursuit of economic goals. It is the policy side of economics and the process of improving the economy by pursuing economic goals. However, what might constitute an improvement for one person might not be an improvement for another.

Science and Policy

The study of economics involves both scientific investigation and policy analysis. Economists use science to explain the world and understand how the economy works, then they explore policies based on the science that are designed to improve the world.

This means that economists practice both:

  • Positive economics, which uses the scientific method to uncover the mechanism of the economy. It seeks to describe the way this world IS.

  • Normative economics, which seeks policies suggested by scientific knowledge to "fix" the world. It seeks to prescribe the way the world SHOULD BE.

Description versus Prescription

  • Positive economics uses the scientific method to uncover the mechanism of the economy, to lay out the rules, to take it apart and see how it ticks. Positive economics seldom has room for debate. Either it is or it is not. Just the facts, which can be verified or refuted.

  • This is not true for normative economics--the policy side of economics. While positive economics seeks to describe the way it is, normative economics seeks to prescribe the way it should be. Normative economics is used to recommend ways to change the world, to improve it, to make it a better place.

  • There is a lot of room for debate over normative economics and what constitutes a better world. A better world for Pollyanna Pumpernickel, might not be a better one for Winston Smythe Kennsington III. In most markets. a better world for sellers is higher prices, while a better world for buyers is lower prices. There are no absolutely right or wrong normative actions.

Working Together

While most folks might choose to do either positive economics or normative economics, most economists do both. That is because both work together. The science of positive economics describes the mechanism of the economy. It lays out the options. If A is done, then B results. But does society really want B? Would everyone prefer to avoid B? The policies of normative economics then prescribe the best way to pursue A, or B, or something else.

Normative Economic Statements

Consider these examples of normative economic statements:
  1. The price of wheat should be $5 a bushel to give farmers a higher living standard and to save the family farm.

  2. The United States would be better off spending $10 billion more on national defense than higher education.

  3. A market-based economy is clearly the best possible economic system.

These are all normative statements, the practice of normative economics, because they depend on value judgments and cannot be proven true or false by comparison against real world data.

  1. Statement (1) makes the judgment that farmers need a higher living standard and that family farms need to be saved. Maybe so, maybe not. Consumers who purchase more expensive wheat products (bread, tobuoli, snack cakes) might argue otherwise.

  2. Statement (2) makes the value judgment that national defense is more deserving of this $10 billion than education. Maybe it is, maybe it is not. Students, professors, and others in higher education who suffer from less funding might think otherwise.

  3. Lurking somewhere behind statement (3) is a hidden value about what constitutes the "best" economic system. Is it a system that achieves the economic goal of efficiency better than other systems? But what if society would rather achieve the goal of equity? Or stability? Maybe it is the best system, maybe it is not.

The key with each of these statements is that value judgments are involved.

<= NORMAL PROFITNOT IN THE LABOR FORCE =>


Recommended Citation:

NORMATIVE ECONOMICS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 18, 2018].


Check Out These Related Terms...

     | positive economics | fallacies |


Or For A Little Background...

     | economics | economic goals | mixed economy | political views | liberal | conservative |


And For Further Study...

     | economic analysis | economic science | empirical | assumption | marginal analysis | seven economic rules | three questions of allocation | dismal science | economic thinking | four estates | distribution standards | government functions |


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