Money

Definition - any substance that serves as a medium of

exchange, measure of

value, store of value

Money

Medium of Exchange Accepted by all

parties as payment for goods and services

Examples: Gold Silver Salt (salarium =

salary)

MoneyMeasure of Value Common

denominator that can express worth in terms everyone understands

MoneyStore of Value Purchasing power

can be saved until needed

History of MoneyEarly Societies Variety of forms:

Tea bricks in China Compressed cheese

in Russia Spear necklaces in

East Africa Commodity money –

has an alternative use Fiat money – by

government decree

History of MoneyExamples in Colonial

America Commodity Money

Gunpowder Musket balls Corn Hemp Tobacco

Fiat Money Wampum – one

English penny = 6 white or 3 black shells

History of MoneyColonial America Paper Currency

Printed money usually backed by gold or silver

Specie Coins made of gold

or silver

History of MoneyOrigins of the Dollar

Spanish Peso - most common currency in America in 1789

Known as “pieces of eight” - it had eight sub-parts or “bits”

“dollar” (from Austrian “taler”) became our monetary unit with 10 sub-parts instead of 8

“Two bits” = .25¢

History of MoneyCharacteristics of Money

Portability Durability Divisibility Limited availability

History of Money

Does our money today meet these characteristics? Portability Durability Divisibility Limited availability

History of MoneyGroups Assignment

In groups of 3-5, read the text book (pages 292-298) to determine the following information on the history of money in the U.S.:

Dates Backing (gold, silver, etc.) Problems or issues with it Report findings to the class and complete the

chart on the following slide for a grade

Early Banking in U.S.

Era Years Backing Problems/Issues

Privately Issued Bank Notes

Greenbacks

National Currency

Gold/Silver/Treasury Notes

Gold Standard

Managed Money Supply

Early Banking in U.S.

Era Years Backing Problems/Issues

Privately Issued Bank Notes

Greenbacks

National Currency

Gold/Silver/Treasury Notes

Gold Standard

Managed Money Supply

1776-1850

1850-1862

1863-1882

1882-1900

1900-1934

1934-today

Gold? silver?None?

None

U.S. gov’t bonds

Gold or silver

Gold

None

No control

No backing, lost faith in them, 10,000 diff. kinds

Shifted from private to public control

No single standard

limited supply of gold, price changes

Money supply can change; affects economy

Modern Banking

Federal Reserve System 1913 – central bank created Private corporation –

shares owned by private banks

Publicly controlled – chairman appointed by President (approved by Congress)

Prints Federal Reserve Notes – inconvertible fiat money since 1934

Modern Banking

Federal Deposit Insurance Corporation (FDIC) 1933 – Act of Congress

during the Depression At first insured $2,500 on

all accounts Now insures $250,000

$250,000

Modern Banking

Other Depository Institutions Savings Banks – owned by

stockholders Began offering NOW

accounts in 1970s – pay interest on balance in the checking account

Modern Banking

Other Depository Institutions Credit Unions

Owned by and operated for its members

Non-profit Offer NOW accounts too

Modern Banking

Other Depository Institutions Savings & Loan

Associations Most money used for

home mortgages Insured by Federal

Savings and Loan Insurance Corp. (FSLIC) since the 1930s

Modern Banking

Problems with Savings & Loans Deregulated during Pres.

Reagan’s term of office (1970s)

High interest rates for loans caused many to close

Fraud, corruption, scandals Government stepped-in

and paid $300 billion to “bail out” the savings banks

Modern Banking

Problems with Banks Failures caused because

of: Poor management Make loans without

adequate collateral (people borrow money without anything to sell to pay it back)

Economy is weak (businesses not growing)

Measuring the Nation’s Output

GDP – Gross Domestic Product Dollar amount of all

goods, services, and structures produced in a country in a year

Single most important measure of a country’s overall economic performance

Honda plant – Greenburg, IndianaIs this included in GDP?

How is the dollar amount of each of the products on the table calculated?

Measuring the Nation’s Output

Consumer Price Index Price ranges for about 90,000 items in 364

categories from 85 areas of the country Compared with 1982-84 prices

Measuring the Nation’s Output

Real GDP GDP in constant dollars – adjusted for

inflation since 1996

Current GDP GDP that is not adjusted to remove the

effects of inflation

inflation – rise in the general level of prices

GDP and Population

Demographers People who study growth, density, and other

characteristics of the population to include: Fertility rate – number of births that 1,000

women will undergo in a lifetime Life expectancy – average life span Net immigration – change in population from

people leaving and entering country

Census Official count of all people every ten

years

GDP and Population

GDP and Economic Growth

Long Term Growth Measured by real GDP per capita – dollar

amount of real GDP produced on a per person basis

adjusts for both inflation and population

Short Term Growth Measured by real GDP over the last 1-5

years (GDP adjusted for inflation)

Business Cycles and Fluctuations

►Business Fluctuations Irregular rise and fall of real GDP

over time

►Business Cycles Regular ups and downs of real GDP

Business Cycles and Fluctuations

► Trough Turn-around

point where real GDP stops going down

► Recession Real GDP

decline for 2 quarters in a row (averages 11 months)

► Expansion Period of

recovery from a recession (averages 43 months)

Possible Causes of Business Cycle

1. Capital Expenditures

► Build too many new plants in expansion years

► Pull back/layoff employees causing recession

Starbucks plans to close 600 stores across U.S.12,000 employees affected, but company hopes to absorb some

Possible Causes of Business Cycle

2. Inventory Adjustments

► Businesses increase inventories in expansion period

► Reduce inventories at first sign of slowdown

► Causes a fluctuation in real GDP/recession

Possible Causes of Business Cycle

3. Innovation and Imitation

► New product or technology results in business growth and imitators compete for a share of the market (dot com bubble)

► When they have caught up, investments slow down again

Possible Causes of Business Cycle

4. Monetary Factors► Credit and loan

policies of the Federal Reserve System

► Low interest rates, loans easy to get – stimulates investment

► As demand for loans increases (shortage), interest rates rise, and borrowing slows down

Possible Causes of Business Cycle

5. External Shocks► Increases in oil

prices in 2001, 2008

► International conflict/wars

► Can be positive – discovery of a new energy source (North Sea oil, gas in Gulf of Mexico)

DOHA, Qatar, Oct. 19 — OPEC producers sought to reassert their grip on falling oil markets on Thursday by backing a production cut of 1.2 million barrels a day, and suggested more reductions could follow this year to prop up sagging prices.

Index of Leading Economic Indicators

Index of Leading Economic Indicators – monthly statistics that can predict recessions

Clinton elected

Unemployment►Unemployment Rate – number of

unemployed individuals divided by the total number of persons in the civilian labor force

Rises during a recession

Unemployment►Unemployment Rate – does not

include: People not trying to get a job People working part-time

Kinds of Unemployment1. Frictional Unemployment –

workers who are between jobs for some reason or another

2. Structural Unemployment – caused by fundamental change in technology or consumer tastes

Kinds of Unemployment3. Cyclical Unemployment – directly

related to swings in the business cycle (recession)

4. Seasonal Unemployment – caused by changes on the weather or changes in demand (takes place every year)

Kinds of Unemployment5. Technological

Unemployment – less skilled workers are replaced by machines, robots, and other equipment

Where are all the workers??

Inflation► Measuring inflation: the relative price

level for products at some point in time► Inflation is reported in terms of annual

rates of change of the price level

What usually happens to inflation during a recession?

Causes of Inflation1. Demand-pull: demand for

goods exceeds supply (shortage) and prices are pulled up

Causes of Inflation2. Government deficit spending:

demand increases due to government spending, causes a shortage and prices rise

Deficit Spending:Government spending money it does not have

Causes of Inflation3. Rising labor costs: as laborers

demand higher wages, businesses increase prices to offset costs

Causes of Inflation4. Too much money in

circulation: Federal Reserve increases money supply

The Fisher Equation

MV=PQM = Amount of Money in CirculationV = Velocity of money (times each

monetary unit is spent in a year)P = Price Level (average of all

goods/services)Q = Physical Quantity of all

goods/services in a yearPQ = Total amount spent in an economy

in a year

How the Fisher Equation WorksMV=PQ

Year One: M=100 V=4 P=10 Q=40 (100)(4)=(10)(40)

Year Two: M=200 V=4 (stays constant) P= ? Q=40 (does not change in short

run)What happens to the price with an

increase in the money supply? (200)(4)=(?)(40)

P=20

Effects of Inflation1. Dollar buys less

Effects of Inflation2. People change spending

habitsPut off buying big ticket

items

Effects of Inflation3. Some people invest in luxury

items hoping the price will rise

Effects of Inflation4. Borrowers pay back loans

with devalued dollars and lenders lose out

On a clean sheet of paper, complete this graphic organizer: Causes of Inflation

1.

2.

3.

4.

Kinds of Unemployment

1.

2.

3.

4.

5.

Causes of Business Cycle

1.

2.

3.

4.

5.

Economic Instability

Group Activity (p. 394-400)

Distribution of Income:

►What is the Lorenz Curve?►What is a quintile?►Which quintile earned the most

income in 2000?►What percentage of the total

income was earned by the lowest quintile?

Group Activity (p. 394-400)

Reasons for Income Inequality :

Group Activity (p. 394-400)Poverty, reasons for a growing

income gap :

Group ActivityAnti-poverty Programs :

Income Assistance – Example

General Assistance – Example

Social Service Programs – Example

(p. 394-400)

Group Activity Anti-poverty Programs :

Tax Credits – Example

Enterprise Zones – Example

Workfare Programs – Example

Negative Income Tax – Example

(p. 394-400)

Group ActivityPersonal Income by State :

Which state has the highest income?

Which state has the lowest income?

Where is Texas on the scale?

Which states have the highest and lowest percentage of growth?

(p. 394-400)

Stock Market

►Stocks – ownership certificates in a corporation When someone

purchases a share of stock, he/she becomes an owner of a corporation

Can then vote for a board of directors to set the company’s policies and goals

Stock Market

►Stock Exchanges – places where buyers and sellers meet to trade securities (for example: shares of stock)

Stock Market

►The New York Stock Exchange – located on Wall Street Has 1,440 seats, or

memberships Members pay several

million dollars for each seat

Lists stocks from over 3,000 companies

Stock Market

Dow Jones Industrial Average

► Most popular measure of stock market performance

► Includes stock prices of 30 companies

3M Co.

Alcoa Inc.

American Express Co.

AT&T Inc.

Bank of America Corp.

Boeing Co.

Caterpillar Inc.

Chevron Corp.

Citigroup Inc.

Coca-Cola Co.

E.I. DuPont de Nemours & Co.

Exxon Mobil Corp.

General Electric Co.

General Motors Corp.

Hewlett-Packard Co.

Home Depot Inc.

Intel Corp.

International Business Machines Corp.

Johnson & Johnson

JPMorgan Chase & Co.

Kraft Foods Inc. Cl A

McDonald's Corp.

Merck & Co. Inc.

Microsoft Corp.

Pfizer Inc.

Procter & Gamble Co.

United Technologies Corp.

Verizon Communications Inc.

Wal-Mart Stores Inc.

Walt Disney Co.

Dow

Bull vs. Bear Markets

► Bear Market – “mean” market Prices of stocks

going down for several months or years

► Bull Market – “Strong” market Prices going up for

several months or years