Economics Money

Bartering
Exchanging products or services with others by agreeing on their values without using money. This is difficult because of setting values & having something to trade.
Money
Replaces the need for bartering. Money allows us to exchange Value for goods & services and is more widely accepted, it has a portable measure of value and a designated, predetermined, clear value. It is a unit of account (what something is worth in dollars in the U.
S.
Forms of Money
2 Forms 1) IN HAND- cash & coins 2) IN ACCOUNTS-credit, debit (can store & transfer money using banks & financial institutions.
In Hand Pro
Instant access
In Hand Con
Large sums can’t be carried & could be lost
In Accounts Pro
Won’t get lost, stolen
In Accounts Con
Don’t have instant access & there are fees to use
Silver Certificate
Is considered Representative Money
Representative Money
Money that is backed by an item of value, such as gold or silver (gold or silver standard), that can be exchanged for a valuable good, allows currency to be traded for a commodity as gold or silver.
Modern Paper Money
Fiat Money
Fiat Money
Money that has value simply because the government says it does is, value is influenced by exchange rates and can change in value because of government regulations.
Gold Coins
Commodity Money
Commodity Money
Objects that have value in themselves and that are also used as money, often includes gold & silver. Was the most common form of money in the past.
Characteristics of Currency
Has a value
Can vary from nation to nation
Can be divisible (ex: can be divided) & have denominations (ex: the Euro)
U.S. currency is backed by trust, not gold or silver
Characteristics of Money
Divisible, portable, acceptable, scarce, durable
Liquidity
The measure of how quickly an investment can be converted into cash
Cash
The most liquid form of money
M1
Category of money supply that is currency in circulation and money in demand (checking) accounts. Plus travelers checks. More liquid.
M2
Category of money supply that includes all four categories of money (Cash & Currency in circulation and Demand accounts (M1) and Savings accounts, Investment accounts) CDs, Money Market accounts. Savings & Investment accounts are less liquid.
Demand accounts
Checking & Savings accounts because you can withdraw money
Savings accounts
What types of money are NOT included in M1, the Basic Money Supply? Savings accounts are M2
Investment accounts
Managed Accounts, can help people make their money grow over time, and be prepared for large expenses, for example college education.
Exchange
Economy depends on the ABILITY OF CITIZENS TO EXCHANGE
Value
Changes in value compared to other country’s (exchange rate) example .75 Euro = 1.00 U.S.
Money Supply
A nation’s money supply is the amount of money available in the economy at one time. The supply must be monitored and balanced to make sure that the right amount of money exists so that inflation does not occur rapidly.
What does “This note is legal tender for all debts, public and private” guarantee
US Currency has value backed by the federal government
Circulation
Purposes of Money
Serves as a way to help us exchange value
Helps us store value that we have created
Helps us to assign value to things that can be bought and sold
Why is it important that money is portable & acceptable
The portability of money allows us to make purchases easily
The acceptability of money saves us from confusion
Both of the above qualities allow us to exchange value more easily
Why do economists study the money supply?
It is important to study the supply of money so we can understand how accessible money is in our system. Because money can exist in different forms and in different kinds of accounts, it can be more or less liquid.
The money supply allows us to assess the liquidity of money and categorizing the money supply helps us to understand how accessible money is.
How does government spending affect the economy?
Allocate
To set apart or designate for a special purpose; to distribute to those who are needy
Budget
A plan that balances available resources and expenses.
Debt
An obligation to pay something.
Deficit
Spending in excess of revenue that has to be financed with borrowed money.
Expenditures
Money spent.
Surplus
Revenue in excess of spending.
Fiscal Policy
Government approach to taxing & spending.
Taxes to Govt to spending.
Goals of Govt Spending
Meeting public needs (safety, police, education, health care, infrastructure), Improving economic indicators.
Budget Director
The individual designated to be in charge of preparing an organization’s budget.
Social Needs
When the government spends to improve education or health care.
Economic Needs
When the government spends to improve the unemployment rate or increase GDP.
Gov’t’s spend $ in targeted ways with the goals of
Reducing unemployment
Improving economic stability
Improving production
Encouraging competition
Gov’t leaders try to
Balance social needs & economic growth
Money spent on education
Helps create great teachers=great students=better economy
Spending can be inefficient for many reasons
Personal motivation-voters & govt leaders are motivated by personal needs (Pork)
Special interests-can receive extra attention at the public expense
Heavy social needs-Social needs can be costly to resolve
Govt Budget
Details how $ is spent in a year, . A budget shows how the govt plans to: allocate & to programs & projects
operate services & departments, create funds to buy equipment & supplies for the govt, the goal is to have a balanced budget
Balanced budget
Revenues=Expenditures
Deficit Spending
Requires a govt to take on debt, causes debt to increase
Interest
The govt must pay interest on the borrowed $
Interest is added
To the budget
Funds are borrowed
From citizens or from other countries (China, Europe, Sales of govt bonds
Big deficit started in
2008
Spending Categories
Mandatory-required by law 58%
Discretionary-can be changed each year 36%
Interest-interest payments on gov’t debt 6%
Gov’t Spending Can
Inject capital into the market
Reduce unemployment by creating projects for people to work on, People will have $ to spend
Increase production
Leakages
The savings, taxes and import spending that remove spending from the circular flow of income.
Circular Flow Mode-Factors of Production
Taxation to Gov’t Sector to Govt Spending that is injected into Firms that Pay Employees who Buy Goods & Services in Households to Leakages ($ taken out of the circular path as savings, taxes, & paying for imports)
Then back to Taxation.
Gov’t Employs
Millions of Americans & that affects levels of unemployment and levels of spending,
Direct Payments
The gov’t directly pays the employees,
Gov’y programs provide income support to millions of citizens (example: Social Security, Medicare)
Government Grants
Gov’t sends funds to state & local governments
Companies & universities receive special grants to complete projects (example: rebuild roads, projects, etc). Government spending can greatly affect the US economy.
Approaches to Spending
1. Expansionary Spending
Spending occurs when the gov’t chooses to run a larger deficit. The theory is that raising spending stimulates the economy. (Raising revenue & lowering expenditures)
Positive Effects
More jobs, Helps business grow, Helps new industries develop, Funds research & development
Negative Effects
Can lead to debt, Can cause inflation & higher prices
Approaches to Spending
2. Contraction Policy
Gov’t chooses to REDUCE the deficit or GAIN a surplus. The theory is that cutting spending improves gov’t finances.
PositiveEffects
Reduces debt, Improves inflation & lowers prices
Negative Effects
Can increase unemployment, can reduce consumer spending