Download Suppose a generous relative gave you a gift of $1000 for your high

Money
What is Money?
Suppose a generous relative gave
you a gift of $1000 for your high
school graduation. In a short
paragraph outline what you would
do with the money and the reason
behind your decision. Can money
buy happiness?
3 Uses of Money
#1 Medium of
Exchange
#2 Unit of Account
#3 Store of Value
6 Characteristics of
Money
Commodity Money
used to determine the value of something
(commodity); without it, would have to barter
allows you to compare the value of goods and
services (comparison shopping)
retains its value if you spend it or decide to
keep it and save it (except in inflation)
1.Durability- must withstand day to day use
2.Portability- must be easy to carry and
easily exchanged
3.Divisibility- easily divided into smaller
amounts
4.Uniformity- all units are the same no
matter how they’re found
5.Limited Supply- too much money in the
system makes it worthless
6.Acceptability- must be able to exchange it
for goods and services
•consists of objects that have value in
themselves and that are also used as money.
Items of barter in most cases
Representative
Money
•objects that have value because the holder can
exchange them for something else of value. Ex.
form or paper receipts for gold and silver.
Fiat Money
•Money that has value because the government
has ordered that it is an acceptable means to
pay debts. Trusted because of the United
States economic production and potential backs
it. It is also called legal tender
Measure Money
M1
Use what you know: Identify each
item as M1, M2, or M3 on the line
next to the number.
______1.Mutual Fund (savings of
many individuals invested in a variety
of stocks, bonds, and other financial
assets)
______2. Travelers Checks
______3. CD (certificate of deposit)
______4. Cold Hard Cash
______5. Coins
______6. Regular Checking Account
______7. Savings Account
______8. Money deposited into a
bank by a Mexican National.
M2
M3
•Currency in the hands of
the public, in checking
accounts, and in the form
of travelers’ checks.
•M1 consists of assets that
have liquidity, or the
ability to be used as, or
directly converted into
cash.
•They are “cash like.”
•Often referred to as “near
money,” M2 consists of
everything in M1 as well
as in savings accounts,
small denomination time
deposits such as CD’s,
and money market
mutual funds. M2 is not as
liquid. Also called near
money, can be
converted to cash easily.
•M1 + M2 + foreign
deposits
Federal Reserve
Duties of a
Central Bank
1. Holding Reserves
2. Assuring Stability
3. Lending Money
Structure of the
FED
1. 7 members of the Board of
Governors
2. Twelve District Banks
3. Member Banks
4. Federal Open Market Committee
(FOMC) – supervises the sales and
purchases of government securities.
Function of the
FED
Service #1 – Clear Checking
Service #2 – Lending Money
Service #3 – Regulating and
Supervising Banks
Serving the
Federal
Government
Service #1 – Paying Government Bills
-Social Security, Medicare, IRS tax
refunds
Service #2 – Selling Government
Securities (bonds)
Service #3 – Distributing Currency
Money Creation
FED created money whenever banks
receive deposits and make loans.
Factors Affecting
Demand for
Money
Factor #1 – Cash on Hand
Factor #2 – Interest Rates
Factor #3 – Cost of Consumer Goods
and Services
Factor #4 – Level of Income
Reserve Requirements
An
increase
in reserve
requireme
nts cause
banks to
increase
reserves.
A
reduction
in reserve
requireme
nts causes
banks to
decrease
reserves.
Federal Reserve Monetary Policy
Banks
reduce
lending,
causing
the money
supply to
contract.
Money Supply
Reserve Requirements
Banks
increase
lending,
causing
the
money
supply to
expand.
Monetary Policy
Includes the Fed’s actions that
change the money supply in order
to influence the economy.
Required
Reserved Ratio
The portion of your $1,000 that the
bank needs to keep on hand, or
not loan out.
Increase Reserve
Requirements
Discount Rate
Open Market
Operations
Bond
Even a slight increase in the RRR
would require banks to hold more
money in the reserve, shrinking the
money supply.
Could cause too much disruption
in the banking system
The interest rate that banks pay to
borrow money from the FED
Most important monetary tool
The buying and selling of
government securities to alter the
monetary supply
A formal contract to repay
borrowed money with interest at
fixed intervals.
Taxes
Income Tax Questions
Tax=Revenue
Spending=
Expenditures
Is the primary way that the government
collects money. Gives the government money it
needs to operate.
Proportional Taxes
A tax for which the percentage of income paid
in taxes remain the same for all income levels.
Progressive Taxes
A tax for which the percent of income paid in
taxes increases as income increases,
Regressive Taxes
A tax for which the percent of income paid in
taxes decreases as income increases.
Income Tax
Generates the most revenue for the
government.
“Pay-As-You-Can”
Taxation
Income taxes are collects throughout the course
of the year as individuals earn income.
Tax Withholding
Process by which employers take tax payments
out of an employee’s pay before they receive it.
Tax Brackets
Income tax is a progressive tax
Excise Tax
Tax on the sale or production of a good. Range
from gasoline to telephone services.
Estate Taxes
Tax on the estate, or total value of the money
and property, of a person who has died. Paid
before inheritors receive their share.
Gift Taxes
Tax on the money or property that one living
person gives to another.
Import Taxes
Taxes on imported goods, tariffs
GDP
Is this counted in GDP?
For each of the following , write “yes” if it is counted in
U.S, and “no” if it is excluded. Then write a brief reason
explaining your answer.
1. Income received from the sale of your
Apple stock.
2. An increase in business inventories.
3. The services you provided when you
painted your bedroom.
4. A farmer’s purchase of a used tractor.
5. The federal government’s purchase of
new desks for their office workers.
6. A house built this year.
7. The lunch you purchased today at a
restaurant.
8. The commission earned by a real estate
agent when she sold a ten-year-old
home.
9. A homebuilder’s purchase of new tools.
10. A car produced in Mexico by an
American-owned firm.
GDP – Gross
Domestic
Product
Is the dollar value of all final goods & services
produced within a country’s borders in a given
year.
Durable goods – goods that last for a relatively
long time like refrigerators
Non-Durable goods – goods that last a short
time like food and light bulbs
GDP does not
include –
1. Intermediate goods -goods used in the
production of final goods and services.
2. Used goods
3. Black market goods
4. Non-market activities – taking care of kids,
mowing lawn, car washing
5. Imported goods
6. Financial assets – bonds, stocks, transfer
payments
2 Ways to
calculate GDP
Expenditure Approach – Total annual
expenditures on four categories of final goods
or services.
GDP = C+I+G+X-M
C=Consumer goods and services
I= Business and Investments
G= Government
X=Exports
M= Imports
Income Approach – Calculate GDP by adding
up all the incomes in the economy.
Nominal GDP
Real GDP
“Current GDP” is GDP measured in current
prices. It does not account for price level
increase from year to year.
Is GDP expressed in constant, or unchanging
dollars.
Unemployment
Unemployment Foldable
Unemployment
Seasonal
Unemployment
Causes of
structural
unemployment
People without jobs who want and need to work.
-Even in good times unemployment exists and
will impact a percentage of a population.
1.
2.
3.
4.
Cyclical
Unemployment
Frictional
Unemployment
5.
The development of new technology: New
tech can result in job loss. Ex.Typwriters
The discovery of new resources. Ex. Whale
oil
Changes in consumer demand: If a product
falls out of favor a company can fail or
shift production causing unemployment.
Lack of education can lead to
unemployment because basic skills might
be lacking and a worker can not do a job.
Globalization: Because the economy has
become a global economy jobs have been
lost for reasons such as a factory being
moved to take advantage of cheap labor in
another country.
Full Employment
•The level of employment reached when there
is no cyclical unemployment.
•Frictional, seasonal, and structural
unemployment will exist but unemployment
should be no more that 4 to 6 percent.
Underemployment
•A worker doing a job they are considered over
qualified for or a worker working part time
when they desire to work full time is considered
underemployed.
•Underemployed workers are not counted
against full employment.
Structural
Unemployment
Inflation
Inflation Vocabulary
Inflation
Nominal number:
a number that has
not been adjusted
for price level
changes.
Real Number: a
number that has
been adjusted for
price level
changes.
Inflation: a
sustained increase
in an economy’s
overall price level.
Deflation: A
sustained decrease
in an economy’s
overall price level.
Kinds of Inflation
Price Index: a
measurement used
the determine
price level
changes.
Demand-pull inflation – caused by an
excess of total spending beyond the
economy's capacity to produce
Cost-Push inflation (supply-side) – caused
by an increase in per- unit production
costs ( a negative supply shock)
How do you
measure Inflation?
Consumer Price
Index
Or
Inflation Rate: the
percentage change
in the price level
from one time
period to another.
•-general increase in prices. Prices rise,
the same amount of money buys less
GDP Deflator
•a measure estimating the average price
of consumer goods and services
purchased by households.
•measures a price change for a constant
market basket of goods and services from
one period to the next within the same
area (city, region, or nation).
•-calculate the change in the CPI from
year to year to determine the inflation
rate.
Measures the cost of all goods and
services produced domestically;
compares these cost to the cost of the
same goods and services in a base year,
Unexpected Inflation: winners and losers
Kinds of Inflation
Losers:
Which of these situations describes demand-pull
inflation and which is supply-side (cost-push)?
1.
After World War II high demand but limited
supply led to a 30%increase in prices.
2.
In 1972, the OPEC nations limited the supply
of foreign oil to the United States, driving up
all oil prices.
3. The cost of raw materials rises in most
industries, increasing cost for producers, who
then raise prices on their goods.
4.
When a country runs out of money, they solve
this problem by printing more currency to pay
their debts.
5.
6.
Consumers expect inflation to occur in the
near future, do they begin to spend more and
more money today, causing prices to increase.
In the 70s, workers gained increases in wages,
during a period of declining productivity. The
increased costs to producers resulted in
increased prices to consumers.
Fixed-nominal income receivers- receive
payments with increasingly lower real
values
Savers – any wealth held as cash will lose
value. Even wealth held in bank CDs or
savings account will probably not keep
up with inflation.
Lenders (creditors) – receive payment
with lower real values than expected
Employees (in the short-run) – while
nominal wages are fixed and real wages
are failing
Winners:
Borrowers (debtors) – can pay back loans
with “cheaper” dollars
Firms ( in the short-run) if real wages are
failing
Calculations
Calculating a Price Index:
Current-year cost of market basket
Base-year cost of market basket
Calculating Percentage Changes:
New number-old number
Old number
Calculating real number, for example, real
GDP
Nominal GDP
Price index
=Real GDP
Economic Goals
Economic
Goals
Recession
Unemploymen
t Rate 4% to
6%
High Unemployment
Above 6%
Inflation Rate
2%
Deflation – Declining
CPI
GDP Growth
2% to 3%
GDP declining
Expansion
Inflation – Above 2%
What are the
nation’s economic
goals and how do
we measure them ?
•Economic goals include
1.
full employment, which is
measured by the unemployment
rate
2.
stable prices, measured by indices
such as the Consumer Price Index
and
3.
economic growth, measured by
real gross domestic product (GDP).
What Keeps the
Business Cycle
Going In a Positive
Direction?
•Business Investment
•Interest Rates and Credit: Low interest
rates help expansion!
•Consumer Expectations: Confidence
must exist!
•External Shocks: You don’t want surprises,
especially bad ones!
Monetary Policy
Easy Money Policy
Monetary Policy (FED
expands money
supply) = Easy
1. Lower Discount
Rate
2. Lower Reserved
Ratio
3. Buy bonds on the
Open Market
Operations
Monetary Policy (FED
contracts money
supply) = Tight
1. Higher Discount
Rate
2. Higher Reserved
Ratio
3. Sell bonds on the
Open Market
Operations
Tight Money Policy
Actions by the Federal Reserve System to
expand or contract the money supply to
affect the cost and availability of credit.
Monetary policy resulting in lower
interest rates and greater access to
credit; associated with an expansion of
the money supply.
Monetary policy resulting in higher
interest rates and restricted access to
credit; associated with a contraction of
the money supply.
Fiscal Policy
Economic
Goals
Recession
Unemploymen
t Rate 4% to
6%
High Unemployment
Above 6%
Inflation Rate
2%
Deflation – Declining
CPI
GDP Growth
2% to 3%
GDP declining
Fiscal Policy =
Expansionary
1. Increase
government
spending
2. Lower Taxes
3. Increase output
Expansion
Fiscal Policy
Use of government spending and revenue
collection measures to influence the
economy.
Fiscal Year
The budget for the federal government
beginning on October 1st
Government
Income (Revenue)
Personal Income Tax 38%
Social security, Medicare, and
unemployment 27%
Borrowing to cover deficit 20%
Government
Spending
(Expenditures)
Social security, Medicare, Medicaid 41%
National Defense 23%
Social Programs 22%
Net interest on debt 6%
Deficit
Inflation – Above 2%
Fiscal Policy =
Contractionary
1. Decrease
government
spending
2. Higher Taxes
3. Decrease output
A situation in which the budget
expenditures exceed revenues. Spends
more than it makes.
Debt
The total amount of money the federal
government owes to bondholders
Expansionary
Raise government spending or transfer
payments and/or decrease taxes, moves
budget toward a deficit.
Contractionary
Lower government spending or transfer
payments and/or raise taxes, moves
government budget toward a surplus.
Keynesian
Economics
Government spending and taxation
policies to stimulate the economy.
Multiplier
Change in overall spending caused by a
change in investment spending.
Government spending causes greater
national output. = Increase GDP