Extra Credit (Fall 2010)

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Frequently Asked Questions

Q: What role did the Federal Reserve have in the Troubled Asset Relief Program (TARP)?
A: The Troubled Asset Relief Program, or TARP, is a program administered by the U.S. Treasury Department. A variety of both large and small institutions received TARP funding. The Fed's role in this program was to evaluate banking institution requests for TARP funding for those institutions the Fed supervised; the requests were either approved or not approved by the Treasury, and the funding came from the Treasury.
Q: What is the definition of "deflation"?
A: Deflation is a sustained decline in the general price level. Deflation occurs when the annual inflation rate falls below zero. Deflation is dangerous to the economy because lower prices may cause producers to produce less and consumers to delay purchases, potentially leading to even lower prices and to reductions in employment.
Q: Is U.S. money backed by gold?
A: No, the United States and most modern economies use fiat money, which is not backed by gold or any other commodity. The money has value because the government has declared it to be legal tender and there is faith in its value. The soundness of U.S. money is essential to the soundness of our economy.
Q: When was U.S. money taken off the gold standard?
A: In 1971, President Richard Nixon unilaterally ordered the cancellation of the direct convertibility of the U.S. dollar to gold. This act was known as the Nixon Shock. For more information, see the "Gold Standard" article in The Concise Encyclopedia of Economics.