Money

1. Money • Definition - any substance that serves as a • medium of exchange, • measure of value, • store of value

2. Money Medium of Exchange • Accepted by all parties as payment for goods and services • Examples: • Gold • Silver • Salt (salarium = salary)

3. Money Measure of Value • Common denominator that can express worth in terms everyone understands

4. Money Store of Value • Purchasing power can be saved until needed

5. 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

6. History of Money Examples in Colonial America • Commodity Money • Gunpowder • Musket balls • Corn • Hemp • Tobacco • Fiat Money • Wampum – one English penny = 6 white or 3 black shells

7. History of Money Colonial America • Paper Currency • Printed money usually backed by gold or silver • Specie • Coins made of gold or silver

8. History of Money Origins 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¢

9. History of Money Characteristics of Money • Portability • Durability • Divisibility • Limited availability

10. History of Money Does our money today meet these characteristics? • Portability • Durability • Divisibility • Limited availability

11. History of Money 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

12. Early Banking in U.S.

13. Early Banking in U.S. Gold? silver? None? No control 1776-1850 No backing, lost faith in them, 10,000 diff. kinds 1850-1862 None U.S. gov’t bonds Shifted from private to public control 1863-1882 1882-1900 Gold or silver No single standard limited supply of gold, price changes 1900-1934 Gold Money supply can change; affects economy 1934-today None

14. 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

15. 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

16. Modern Banking Other Depository Institutions • Savings Banks – owned by stockholders • Began offering NOW accounts in 1970s – pay interest on balance in the checking account

17. Modern Banking Other Depository Institutions • Credit Unions • Owned by and operated for its members • Non-profit • Offer NOW accounts too

18. 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

19. 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

20. 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)

21. 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?

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

23. 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

24. 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

25. 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

26. GDP and Population

27. 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

28. Business Cycles and Fluctuations • Business Cycles • Regular ups and downs of real GDP • Business Fluctuations • Irregular rise and fall of real GDP over time

29. Business Cycles and Fluctuations • Recession • Real GDP decline for 2 quarters in a row(averages 11 months) • Expansion • Period of recovery from a recession (averages 43 months) • Trough • Turn-around point where real GDP stops going down

30. 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

31. 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

32. 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

33. 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

34. 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.

35. Index of Leading Economic Indicators Clinton elected Index of Leading Economic Indicators – monthly statistics that can predict recessions

36. Unemployment • Unemployment Rate – number of unemployed individuals divided by the total number of persons in the civilian labor force Rises during a recession

37. Unemployment • Unemployment Rate – does not include: • People not trying to get a job • People working part-time

38. Kinds of Unemployment • Frictional Unemployment – workers who are between jobs for some reason or another • Structural Unemployment – caused by fundamental change in technology or consumer tastes

39. 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)

40. Kinds of Unemployment 5. Technological Unemployment – less skilled workers are replaced by machines, robots, and other equipment Where are all the workers??

41. 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?

42. Causes of Inflation 1. Demand-pull: demand for goods exceeds supply (shortage) and prices are pulled up

43. 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

44. Causes of Inflation 3. Rising labor costs: as laborers demand higher wages, businesses increase prices to offset costs

45. Causes of Inflation 4. Too much money in circulation: Federal Reserve increases money supply

46. 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

47. 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

48. Effects of Inflation 1. Dollar buys less

49. Effects of Inflation 2. People change spending habits Put off buying big ticket items

50. Effects of Inflation 3. Some people invest in luxury items hoping the price will rise