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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

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  • Definition - any substance that serves as a

    • medium of exchange,

    • measure of value,

    • store of value


Medium of Exchange

  • Accepted by all parties as payment for goods and services

  • Examples:

    • Gold

    • Silver

    • Salt (salarium = salary)


Measure of Value

  • Common denominator that can express worth in terms everyone understands


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

    • 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 sub-parts or “bits”

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

  • “Two bits” = .25¢

History of Money

Characteristics of Money

  • Portability

  • Durability

  • Divisibility

  • Limited availability

History of Money

Does our money today meet these characteristics?

  • Portability

  • Durability

  • Divisibility

  • Limited availability

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

Early Banking in U.S.

Early Banking in U.S.

Gold? silver?


No control


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



U.S. gov’t


Shifted from private to public control



Gold or silver

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


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)

  • Expansion

    • Period of recovery from a recession (averages 43 months)

  • Trough

    • Turn-around point where real GDP stops going down

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

Rises during a recession


  • Unemployment Rate – does not include:

    • People not trying to get a job

    • People working part-time

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

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: 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


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


Year One: M=100



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?



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

Causes of Inflation





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

Economic Instability

Kinds of Unemployment






Causes of Business Cycle






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:

(p. 394-400)

Group Activity

Anti-poverty Programs:

Income Assistance –


General Assistance –


Social Service Programs –


(p. 394-400)

Group Activity

Anti-poverty Programs:

Tax Credits –


Enterprise Zones –


Workfare Programs –


Negative Income Tax –


(p. 394-400)

Group Activity

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


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

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