$ What is Money $ 3 Functions: –Medium of Exchange (alternative would be bartering actual goods and services) –Standard of Value (prices) –Store of Value (wealth) Currency, the coins and paper bills used as money in an economy. Characteristics: –Durability, portability, divisibility/measurable, inexpensive to produce, easily controlled (scarcity), and acceptability (generally accepted by all)
Types of Money Representative Money: represents and object of value for which it can be exchanged (silver certificate). Ended 1933. Fiat Money: Money that is valuable because the government states that it is an acceptable means to pay debts.
Banking Banking is a vital institution to the American economy. Typically, about half the nation’s money supply is in checking accounts (demand deposits) at a given time. Banks provide account services, security, and loans. Loans promote economic growth. Banks keep a percentage of demand deposits and use the rest for loans and investments. This is known as the fractional reserve principle. Under the Mattress or in the Bank?
LEQ: How does the Government influence the Economy?
Managing the Economy There are 2 main ways the U.S. government manages the economy: –Monetary Policy: regulation of the money supply by the Federal Reserve System. –Fiscal Policy: A government’s decisions about the amount of money it spends and the amount it collects in taxes (Fed. Budget).
Monetary Policy Monetary Policy = Regulation of the money supply by the Federal Reserve System. The Federal Reserve (“the Fed”) was established in 1913 and served as the nation’s first true central bank.Federal Reserve It is divided into 12 Federal Reserve Districts. the Fed is ran by the Board of Governors (7). the Fed Basics,the Fed is known as “the bankers’ bank”the Fed Basics
The Federal Reserve The Gov’s bank. federal gov’s checking accounts (taxes). The gov. writes checks for highways etc. on Federal Reserve Bank accounts. Keeps track of gov. debts. the Fed keeps track of gov. bonds, bills, and notes (when it borrows money). Makes rules for banks. Also, clears checks. Provides currency to banks. the Fed makes loans (at discount rate) to banks when needed.
Regulating the Money Supply 3 Main Tools of the Fed (Monetary Policy): –Reserve Requirements (Req. Reserve Ratio) –Discount Rate (interest rates) –Open Market Operations (buying or selling gov. bonds to banks)
Why meddle in the Economy? Why? –For a healthy economy, spending must be approximately equal to the economy’s ability to produce goods and services (scarcity). –Inflation: a general rise in the prices of goods and services throughout the economy (too much $?).Inflation –Inflation Video DefinitionInflation Video Definition –Not enough money circulation/supply can lead to an economic slowdown or recession. –Depressions are prolonged recessions –Government tries to decrease Unemployment
Zimbabwe Inflation reached 231 Million Percent 10 Million for loaf of bread (2008) 145,750 for roll of toilet paper (2006) 80% Unemployment Government printed trillions of dollars in already impoverished nation. –NY Times ArticleNY Times Article
Fiscal Policy A government’s decisions about the amount of money it spends and the amount it collects in taxes. –Obama’s Budget Proposal (The Federal Budget)Obama’s Budget Proposal –Stimulus Package (Recovery Act) –Bush Tax Cuts, Fiscal Cliff –Health Care Reform –http://www.whitehouse.gov/omb/overviewhttp://www.whitehouse.gov/omb/overview –Deficits, Surplus, National Debt –History of National Debt ArticleHistory of National Debt Article
Taxes Progressive – ex. Fed. Income Tax –Current Tax BracketsCurrent Tax Brackets Regressive – ex. Sales Tax Excise – “sin tax” (tobacco, alcohol) Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax.
How is the economy is doing? (Economic Indicators) CIA World Fact Book Data (U.S.):CIA World Fact Book Data GDP GDP growth rate GDP per capita CPI (Consumer Price Index = inflation) Unemployment Rate Stock Market –Yahoo FinanceYahoo Finance
Gross Domestic Product (GDP) How is the economy doing? GDP is used consistently to measure national output by the United Nations and has replaced the GNP since 1991. GDP = The total dollar value of all final goods (desk not wood/steel/paint) and services produced within the country in a year. Real GDP = adjusted for price changes (inflation) GDP Growth Rate is annual growth as a % U.S. GDP GDP Growth Rate Other Indicators, Unemployment Rate, CPIUnemployment Rate
The 4 Sectors of GDP Personal Consumption Expenditures (C) Gross Investment (I) Government Purchases of goods and services (G) Net Exports (X-M) Output-expenditure model: C + I + G + (X-M) = GDP
Fluctuations in the Business Cycle Business cycles are changes, increases or decreases in real GDP, in a market system’s economic activity.Business cycles are changes, increases or decreases in real GDP, in a market system’s economic activity. Expansion (or recovery): increase in real GDP.Expansion (or recovery): increase in real GDP. Peak: highest point of productivity.Peak: highest point of productivity. Recession (or contraction):Recession (or contraction): A decline in real GDP for two or more consecutive quarters (6 months +). Trough: lowest point of demand, employment, and production.Trough: lowest point of demand, employment, and production. Depression: is a prolonged and severe recession.Depression: is a prolonged and severe recession. http://www.bea.gov/newsreleases/national/ gdp/gdp_glance.htmhttp://www.bea.gov/newsreleases/national/ gdp/gdp_glance.htm