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Chapter 11 Section 1
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Money—any substance that serves as a
medium of exchange, a measure of value,
and a store of value
◦ Medium of exchange—something accepted by all
parties as payment for goods and services
◦ Measure of Value—common denominator that can
be used to express worth in terms that most
individuals understand
◦ Store of Value—allows purchasing power to be
saved until needed
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Commodity money—has an alternative use as
an economic good, or commodity
◦ Example: compressed tea leaves in ancient China
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Fiat money—money by government decree
Both types were used in the U.S. colonies
◦ Tobacco was most common commodity
◦ Paper currency was backed by gold or silver in
some cases or redeemable after taxes were
collected
◦ Specie—coined money was desirable but in short
supply
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Portable
◦ Easily transferred from one person to another
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Durable
◦ Must last when handled and not deteriorate
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Divisible
◦ Easy to divide into smaller units so people can use
only as much as needed
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Limited Availability
◦ Must be limited in supply to keep its value
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Federal government did not print paper
currency but left it to state banks
State banks printed their own currency that
were supposed to be redeemable for gold or
silver
◦ Led to many abuses…Wildcat banks that printed
large amounts of currency in remote areas to make
redemption difficult
◦ Also led to problems with consistency and
counterfeiting…more than 10,000 kinds of paper
currency by the Civil War
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Greenbacks—paper currency was issued by
Congress in order to pay for the Civil War
◦ People still feared that the greenback would lose
value after the war (no gold or silver backing)
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National bank system was established
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Gold Certificates, Silver Certificates, and
Treasury Coin notes were introduced as well
◦ Issued national currency backed by U.S. bonds—
made to seem more secure to public
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In 1900, Congress put U.S. on the gold
standard
◦ Monetary standard under which the basic currency
unit is equal to, and can be exchanged for, a
specific amount of gold
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Advantages
◦ Made people feel more secure about money
◦ Supposed to prevent the government from printing
too much money
 U.S. never did have enough gold to back all of its
currency
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Disadvantages
◦ Gold stock may not grow fast enough to support
the economy
◦ People may suddenly decide to convert their
currency into gold
◦ Price of gold is likely to change dramatically over
time
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Gold Standard was abandoned during the
Great Depression because people wanted to
cash in their money for gold
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Monetary standard under which the fiat
money supply cannot be converted into gold
or silver
Government manages the money supply
Modern money fits all of the characteristics of
money
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Portable
◦ Easily transferred from one person to another
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Durable
◦ Must last when handled and not deteriorate
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Divisible
◦ Easy to divide into smaller units so people can use
only as much as needed
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Limited Availability
◦ Must be limited in supply to keep its value
Chapter 11 Section 3

Federal Reserve System—nation’s first true
central bank
◦ Lends to other banks in times of need
◦ Runs like a corporation with privately-owned banks
owning and is under public control
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Federal Deposit Insurance Corporation (FDIC)
◦ Insure customer deposits in the event of a bank
failure (up to $250,000)
◦ Protection from runs on the bank (happened during
the Great Depression)
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Savings Banks
◦ Depositor owned organization operating for the
benefit of its depositors (mutual savings banks)
◦ Many sold stock to raise capital and became savings
banks
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Savings and Loans Associations
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Credit Unions
◦ Invests the majority of its funds in home mortgages
◦ Nonprofit service cooperative owned by and serving
its members
Chapter 13 Section 1 part 1
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The dollar amount of all final goods and
services produced within a country’s national
borders in a year
◦ Figured by multiplying number of goods and services
produced by their prices (Figure 13.1-pg. 342)
◦ Counts products made in the U.S. even if investors
who own the factories live outside the U.S.
◦ Does not count U.S.-owned factories that are located
outside the U.S.
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Intermediate products—products used to
make other products already counted in GDP
◦ Tires on a new car are counted in the value of the
car…not separately
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Secondhand sales—the sales of used goods
◦ Products are transferred from one person to
another but no new production is created
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Nonmarket transactions—transactions that do
not take place in the market
◦ Difficult to measure the value
◦ The value of mowing your own lawn or all of the
jobs that homemakers perform
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Some nonmarket transactions are part of the
underground economy
◦ Illegal activities such as gambling, smuggling,
drugs, and counterfeiting
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GDP tells us if the amount of production is
increasing or decreasing
GDP does not tell us how production is
changing
◦ No information about quality of life or composition
of output
◦ A $10 million increase could be because of an
increase in military spending on new weapons or
more schools, libraries, etc.
Chapter 13 Section 1 part 2
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The dollar value of all final goods, services,
and structures produced in one year with
labor and property supplied by a country’s
residents
◦ To go from GDP to GNP
 Add all payments that Americans receive from outside
the U.S.
 Subtract all payments made to foreign-owned
resources in the U.S.
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Net National Product (NNP)
◦ GNP minus depreciation (the capital equipment that
has worn out or become obsolete over the year)
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National Income (NI)
◦ Income left after taxes except corporate profits tax
are subtracted from NNP
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Personal Income (PI)
◦ Total amount going to consumers before individual
income taxes are subtracted
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Disposable Personal Income (DPI)
◦ The total income the consumer sector has at its
disposal after personal income taxes
◦ Actual amount the consumer has to spend
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Consumer/ Private Sector
◦ Largest sector of the economy made up of
households
 All persons who occupy a house, apartment, or room
that constitutes separate living quarters
◦ Receives its income in the form of disposable
personal income
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Business/ Investment Sector
◦ Proprietorships, partnerships, and corporations
◦ Brings the factors of production together
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Government Sector
◦ All levels of government
◦ Receives its income from taxes
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Foreign Sector
◦ All consumers and producers outside the U.S.
◦ Difference between the dollar value of goods sent
outside the U.S. and value of goods purchased from
outside the U.S. (X – M)
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Model used to show demand by the
consumer, investment, government, and
foreign sectors
GDP = C + I + G + (X-M)
Chapter 13 Section 2
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Price indices are created in order to measure
changes in price over time and remove the
distortions of inflation (rise in general level of
prices)
◦ A base year is selected and the prices of goods are
recorded as 100 percent
◦ The prices are tracked on those goods over time
and compared to the base year
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Consumer Price Index
◦ Reports price changes for about 80,000 items using
1982-84 as base year
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Producer Price Index
◦ Measures price changes paid by domestic
producers for their inputs (farm products, fuel,
chemicals, etc.)
◦ Uses 1982 as a base year
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Implicit GDP Price Deflator
◦ Average levels of prices for all goods and services
in the economy
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Current GDP does not reflect inflation when
compared over time
Real GDP removes the distortions of inflation
Real GDP = GDP in current dollars /
implicit GDP price deflator x 100
Chapter 13 Section 3
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Population can distort GDP and GNP because it
increases the amount of labor
◦ Per capita shows increase or decrease per person
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Population measurements
◦ Census—official count of all people taken every 10
years
◦ Changes in population
 Households are getting smaller
 Migration trends are towards the western U.S.
 Center of population is in Missouri
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Demographers study growth, density, and
other characteristics of population to help
make decisions
3 most important factors affecting population
◦ Fertility rate—number of births that 1,000 women
are expected to undergo in their lifetime (2,119)
◦ Life expectancy—average remaining life span of
people who reach a given age (75.9 today)
◦ Net immigration—the net change in population
caused by people moving into and out of the
country
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Baby boomers will characterize the
population
◦ Baby boom—high birthrate years from 1946 to
1964
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This generation affects the dependency ratio
◦ Ratio based on the number of children and elderly
for every 100 persons in the working age bracket of
18 to 64
◦ Ratio was 63.9 in 1998 but will rise to 77.5 by 2030
Chapter 13 Section 4
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Two methods of measuring growth
Real GDP per capita—the dollar amount of
real GDP per person
◦ Adjusts for changes in population and inflation
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Growth triangle—table that shows annual
rates of growth between selected periods of
time
◦ Figure 13.10 on page 365
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Benefits a country in many ways
Standard of living is raised
◦ Quality of life based on the possession of
necessities and luxuries that make life easier
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Eases burden of government
◦ Enlarges the tax base (incomes and properties that
may be taxed) which allows for more government
spending
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Helps with domestic problems
◦ More jobs and income for more people
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Helps other nations
◦ Growing business creates jobs for people in other
parts of the world
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Land- With land many nations can depend on
themselves for goods
Capital – People must save, save goods, save
money, etc this allows for more to be created
because some is left over
Labor- the economy cant grow without
workers
Entrepreneurs- these people organize
production in a new way to help the economy
grow
Chapter 14 Section 1
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Systematic ups and downs of real GDP that
interrupt economic growth
Phases of the Business Cycle (pg. 376)
◦ 1st phase—Recession—a period during which real
GDP declines for two quarters in a row (6 months)
 Begins at a peak and ends at a trough
◦ 2nd phase—Expansion—a period of recovery from a
recession
 Occurs until the economy reaches a new peak
◦ Trend line maps the steady growth pattern
◦ Depression—if recession becomes severe
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GDP fell from $103 billion to $55 billion from
1929 to 1933; unemployment went up almost
800%
Causes
◦ Disparity in income between very rich and very poor
 Not enough consumer spending to stimulate economy
◦ Many people borrowed heavily in late 1920s and
had no money to fall back on
◦ Foreign nations stopped buying and selling goods
in the U.S. due to removal of loans and institution
of high tariffs
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Longer periods of expansion and a shorter
recession
Many factors in the business cycle
◦ Changes in capital investment—companies build
when the economy is expanding and then stop after
a while
◦ Inventory adjustments—businesses cut back at first
sign of downturn and build up at first sign of
upturn
◦ Innovation and imitation—businesses innovate to
gain edge; other businesses spend $ to keep up
and then the innovation takes hold
◦ Monetary factors—credit and loan policies of the
Federal Reserve (low rates cause more borrowing
which causes rates to increase)
◦ External shocks—increases in price, war, etc.
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Index of leading indicators is used to predict
the turning points of business cycles
◦ Uses many different statistics to predict—length of
workweek tends to shrink just before a recession
Chapter 14 Section 2
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Measuring unemployment
◦ Unemployed—people available for work who made
a specific effort to find a job during the past month
and worked less than one hour for pay or profit
◦ Unemployment rate—number of unemployed
individuals divided by the total number of persons
in the civilian labor force
◦ Does not count those who have become too
discouraged to look for work or people that are
holding part-time jobs instead of full-time jobs
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Frictional unemployment
◦ Unemployment caused by workers who are between
jobs for one reason or another
◦ People changing jobs for the better or looking for
new jobs
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Structural unemployment
◦ Unemployment that occurs when a fundamental
change in the operations of the economy reduces
demand for workers or skills
◦ Caused by changes in technology or consumer
tastes
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Cyclical unemployment
◦ Unemployment directly related to swings in the
business cycle
◦ People out of work due to recession and industry
lay-offs who may get jobs back after recession ends
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Seasonal unemployment
◦ Unemployment resulting from changes in the
weather or demand for certain products
◦ Carpenters and builders during the winter—work is
less regardless of health of the economy
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Technological Unemployment
◦ Unemployment caused when workers are replaced
by machines
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Full Employment
◦ Means the lowest possible unemployment rate with
the economy growing and all factors of production
being used as efficiently as possible
Chapter 14 Section 3
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Measuring Inflation
◦ Price level—relative magnitude of prices at one
point in time
◦ Inflation rate
 Change in price level / beginning price level x 100
◦ Deflation—decrease in general price level (rare)
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Creeping inflation
◦ Inflation in the range of 1 to 3 percent per year
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Galloping inflation
◦ More intense inflation that can go as high as 100 to
300 percent
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Hyperinflation
◦ Out of control—500 percent or above
◦ Generally last stage before total monetary collapse
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Demand-pull theory—all sectors try to buy
more goods than are produced (pulls prices
up)
Rising input costs drive up the cost of
products
◦ Self-perpetuating spiral of wages and prices (high
prices force workers to demand higher wages which
raises prices)
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Excessive monetary growth—money supply
growing faster than real GDP drives up prices
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Decreased purchasing power—dollar buys
less
People change their spending habits—borrow
less for major purchases
Lenders are hurt more than borrowers
◦ Money is paid back in inflated dollars