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)
Money
Measure of Value
 Common
denominator that
can express worth
in terms everyone
understands
Money
Store of Value
 Purchasing power
can be saved until
needed
History of Money
Early 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 Money
Examples in Colonial
America
 Commodity Money
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Gunpowder
Musket balls
Corn
Hemp
Tobacco
 Fiat Money
 Wampum – one
English penny = 6
white or 3 black
shells
History of Money
Colonial America
 Paper Currency
 Printed money
usually backed by
gold or silver
 Specie
 Coins made of gold
or silver
History of Money
Origins of the Dollar
 Spanish Peso - most
common currency in
America in 1789
 Known as “pieces of
eight” - it had eight subparts or “bits”
 “dollar” (from Austrian
“taler”) became our
monetary unit with 10 subparts instead of 8
 “Two bits” = .25¢
History of Money
Characteristics of Money
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Portability
Durability
Divisibility
Limited availability
History of Money
Does our money today
meet these
characteristics?
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Portability
Durability
Divisibility
Limited availability
History of Money
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Groups 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
Privately Issued
Bank Notes
Greenbacks
National
Currency
Gold/Silver/
Treasury Notes
Gold Standard
Managed
Money Supply
Backing
Problems/Issues
Early Banking in U.S.
Era
Years
Backing Problems/Issues
Privately Issued 1776-1850 Gold? silver? No control
None?
Bank Notes
No backing, lost faith in
1850-1862
None
Greenbacks
them, 10,000 diff. kinds
Shifted from private
to public control
National
1863-1882 U.S. gov’t
bonds
Currency
Gold/Silver/
1882-1900 Gold or silver No single standard
Treasury Notes
limited supply of
1900-1934
Gold
Gold Standard
gold, price changes
Managed
1934-today
Money Supply
None
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, Indiana
Is 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
 Current GDP
 GDP that is not adjusted to remove the
effects of inflation
 Real GDP
 GDP in constant dollars – adjusted for
inflation since 1996
inflation – rise in the
general level of prices
GDP and Population
 Census
 Official count of all people every ten
years
 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
GDP and Population
GDP and Economic Growth
 Short Term Growth
 Measured by real GDP over the last 1-5
years (GDP adjusted for inflation)
 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
Business Cycles and
Fluctuations
► Business
Cycles
 Regular ups and downs of real GDP
► Business
Fluctuations
 Irregular rise and fall of real GDP over
time
Business Cycles and Fluctuations
► Recession
 Real GDP
decline for
2 quarters
in a row
(averages 11
months)
► Trough
 Turn-around
point where
real GDP
stops going
down
► 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 Clinton
elected
Index of Leading Economic
Indicators – monthly statistics that
can predict recessions
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 Unemployment
1.
2.
Frictional Unemployment – workers
who are between jobs for some reason or
another
Structural Unemployment – caused by
fundamental change in technology or
consumer tastes
Kinds of Unemployment
3. 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 Unemployment
5. Technological
Unemployment – less
skilled workers are
replaced by machines,
robots, and other
equipment
Where are all the workers??
► Measuring
Inflation
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 Inflation
1.
Demand-pull: demand for goods
exceeds supply (shortage) and prices are
pulled up
Causes of Inflation
2.
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 Inflation
3. Rising labor costs: as laborers
demand higher wages, businesses increase
prices to offset costs
Causes of Inflation
4. Too much money in circulation:
Federal Reserve increases money supply
The Fisher Equation
MV=PQ
M = Amount of Money in Circulation
V = 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 year
PQ = Total amount spent in an economy in a
year
How the Fisher Equation Works
MV=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 Inflation
1.
Dollar buys less
Effects of Inflation
2.
People change spending habits
Put off buying big ticket
items
Effects of Inflation
3. Some people invest in luxury items
hoping the price will rise
Effects of Inflation
4. 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.
Economic Instability
Kinds of Unemployment
Causes of Business Cycle
1.
1.
2.
2.
3.
3.
4.
4.
5.
5.
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 Activity
Anti-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 Activity
(p. 394-400)
Personal 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?
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.
Dow
Citigroup Inc.
Coca-Cola Co.
E.I. DuPont de Nemours & Co.
Exxon Mobil Corp.
General Electric Co.
General Motors Corp.
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