The document discusses several topics related to money and economics: 1. It defines money and describes its main functions as a medium of exchange, store of value, and standard of value. Throughout history, various commodities have served as money. 2. Modern fiat money is no longer backed by gold or silver but is accepted due to trust in governments. The money supply includes currency as well as checkable deposits and other liquid assets. 3. Banks play a key role in money creation through fractional reserve banking by lending out deposits. The Federal Reserve influences monetary policy through tools like open market operations and interest rates.

1. Unit 5 Notes

2. What is money?
• Task!
• What is money?
• What is the function of money?
• What has served as money throughout history?

3. It’s Complicated…
• “What is money, nowadays”- New York Times July
20, 1975
• Mr. A.F. Davis mailed a ten dollar Federal Reserve Note to
the Treasury Department, asking that it be redeemed for
“lawful money” as the note stated
• In response, they sent him 2 $5 bills bearing a similar
promise to pay
• “…I am enclosing one of the $5 notes which you sent to
me. I note that it states on the face, “The United States of
America will pay to the bearer on demand five dollars.” I
am hereby demanding five dollars.

4. • One week later, he received a letter from the acting
Treasurer, M.E. Slindee:
• Dear Mr. Davis,
• Receipt is acknowledged of your letter transmitting one $5 United
States note with a demand for payment of five dollars. You are
advised that the term “lawful money” has not been defined in
federal legislation…
• The phrases “…will pay to the bearer on demand” and
“…is redeemable in lawful money” were deleted from our
currency altogether in 1964

6. Money
• Money has Three Basic Functions:
• 1. Medium of Exchange- enables us to
carry out trade and commerce easily
• 2. Standard of Value- allows us to
measure and compare value using one
scale
• 3. Store of Value- it (usually) holds its
value over time

7. Money
• Money also has Six Main
Characteristics:
• 1. Acceptability- in order for you to buy something, the seller must
be willing to accept what you offer as payment
• 2. Scarcity- needs to be scarce enough to be
valued by buyers and sellers

8. • 3. Portability- in order to
be convenient as a
medium of exchange it
must be portable
• 4. Durability- if money is
to serve as a store of
value, it must be durable

9. • 5. Divisibility- to be useful
as a medium of
exchange, money must be
easily divided into smaller
amounts
• 6. Uniformity- a dollar is a
dollar is a dollar. We take
for granted that each dollar
is the same as the next.

10. What Serves as Money?
• Throughout history, many items such as:
salt, shells, cattle, beads, fur, tobacco, gold, and silver have served
as money
• These are called commodity money
• Gold and silver have generally been preferred because
they hold many of the characteristics of money

11. What about today?
• However, our money is no longer backed by precious
metals such as gold and silver
• Fiat money- paper money decreed as legal tender, but
not representing anything of intrinsic worth
• Rather, money is accepted solely
because we believe that it is worth
something, and is backed by the
“full faith and credit” of the United States
government
Trust me!

12. What is Currency and Money Supply?
• Currency- the bills and coins
currently in circulation in the
economy
• However, currency is only a part
of the total money supply in the
country
• Task! Take one minute to
discuss with your partner
what else makes up the
money supply

13. M1& M2 Money Supply
• M1 Money Supply is made
up of:
• Coins and bills (currency)
• Checkable deposits (liquid
assets)
• Travelers Checks
• M2 Money Supply is made
up of:
• All of M1
• Less liquid assets such as
savings deposits, etc.

14. • So how is that money (M1 and M2) transferred between
people?
• By banks!

15. The Banking System in a Nutshell:
• Fractional Reserve Banking- a system whereby banks
keep a fraction of deposits in reserves but loan out the
rest to businesses and consumers
• **In a sense, as banks continuously lend money that is not in
reserves they are “creating money”. This lending is increasing the
flow of money that ordinarily wouldn’t be able to happen!**

16. How much do banks need to keep on
reserves?
LOAN
Dave’s $640
LOAN
Kim’s $800 Kim’s $800
Pat’s $1000 Pat’s $1000 Pat’s $1000

17. Monetary Policy- what is it?
• Monetary Policy- central
bank policy aimed at
regulating interest rates and
the amount of money in
circulation to influence the
health and direction of the
economy

18. The Federal Reserve (Fed)
• The Federal Reserve is America’s central bank,
established in 1913
• Congress gave the Fed enough power to act
independently in regards to monetary policy

19. Structure of the Fed
• 1. Board of Governors
• 7 member board that oversees the Fed from Washington D.C.
• Appointed by the president and confirmed by the Senate for one 14
year term in office
• President selects one governor to serve as chairman for 4 years
• Responsible for the overall direction of monetary policy

20. Structure of the Fed
• 2. Regional Federal
Reserve Banks
• 12 regional banks
• Carry out many of
the day-to-day duties
• Each regional bank
overseen by a
president

21. Structure of the Fed
• 3. Federal Open Market
Committee (FOMC)
• Consists of:
• All 7 governors from the
Board of Governors
• 5 rotating regional fed
presidents
• **But always New York’s
president
• FOMC is the policymaking
body of the Fed
• Study economic
information and decide
what changes (if any) to
make to monetary policy

22. How does the Fed influence monetary
policy?
• Task! Take one minute to discuss:
• How you think the Federal Reserve can influence
monetary policy (money supply and interest rates) in the
U.S?
• What might the effects be of those actions?

23. 3 Main Tools of the Fed
• 1. Open Market
Operations- the buying
and selling of government
securities in the bond
market (most used tool)
• Easy-Money Policy
(Expansionary) :
• Fed bond traders buy
government securities, which
increases the money supply
• Tight-Money Policy
(Contractionary) :
• Fed bond traders sell
government securities, which
decreases the money supply

24. • 2. Reserve requirement-
the minimum percentage of
deposits that banks must
keep in reserve at all times
(least used tool)
• Lowering the ratio would lead
to banks lending and
“creating” more money
• Expansionary policy
• Raising the ratio would lead
banks to stop lending and
keep more cash in reserve,
decreasing the money supply
• Contractionary policy

25. • 3. The Discount Rate- the interest rate
the Fed charges on loans to private banks
(last tool in their toolbox)
• This tool leads to the Fed being known as the
“lender of last resort”
• Controlled by the Board of Governors
• Expansionary policy:
• A low rate makes it less costly for banks to borrow, increasing money
supply
• Contractionary policy:
• A higher rate makes it more costly for banks to borrow, decreasing the
money supply

26. The Fourth “Tool”
• 4. Federal Funds Rate- the rate that banks charge one
another for quick (overnight) loans
• Because the Fed cannot control this, it is not considered one of its
3 tools
• However, the Fed sets a target Fed. Funds Rate and does its best
to use open market operations in order to achieve that rate
• The Federal Funds Rate affects the interest rate on everything:
credit cards, mortgages, savings accounts, bonds, etc.

27. Fiscal Policy
• Fiscal policy- government policy regarding taxing and
spending

28. Taxes
• Tax- a mandatory payment to the
government
• How should we be taxed?
• 1. Ability-to-pay: citizens should be taxed
according to their wealth/income
• 2. Benefits-received: those who benefit from a particular
government program should pay for it
• Task! What are taxes used for?

29. Tax Terms you need to know
• Tax Base: the thing that is taxed
• Could be real estate property, personal income, or a consumer
good
• Tax Rate: percentage of income—or of the value of a
good, service, or asset—that is taxed

30. 3 Ways We Can be Taxed
• 1. Proportional Tax- a tax
that takes the same share
of income at all income
levels

31. • 2. Progressive tax- a tax that takes a larger share of
income as income increases (based on ability-to-pay
principle)

32. • Regressive tax- a tax that takes a smaller share of
income as income increases

33. Types of Taxes
• 1. Personal Income
Tax- a progressive tax
for the federal
government taken from
our income

34. • Payroll Tax- taxes
deducted directly from
employee paychecks
• The 2 largest payroll
taxes fund Social
Security and Medicare

35. • Property tax- taxes levied on the value of real property,
such as land and homes, or on personal property such as
cars and boats

36. • Sales Tax- a tax on the
sale of goods, paid by the
customer at the time of
purchase
• Most states and many
cities have a general sales
tax
• Task! What is PA’s sales
tax percentage?

37. • Corporate Income
Tax- a progressive tax
on company profits

38. • Excise tax- tax on the sale of certain goods the
government wants to limit (sin taxes)
• Luxury tax- tax on the sale of more expensive items
bought primarily by the wealthy

39. • User Fees and Tolls- taxes charged for the use of public
facilities and services and for permits and licenses

40. • Estate or inheritance Tax- tax on the assets left to heirs
by someone who dies (progressive)

41. Aggregate Supply and Demand
• Aggregate supply = total supply of goods and services
produced in the nation’s economy
• Aggregate demand = total demand for goods and services
in the nation’s economy

42. Fiscal Policy Part II: Government Spending
• Main sources of
Government revenue:
• Individual income tax
• Payroll taxes
• Corporate income taxes
• Excise taxes

43. What does the government spend money
on?
• Mandatory spending- fixed by law
(interest on the debt, Medicare, Social Security, etc)
• Discretionary spending- can be raised or lowered as
Congress sees fit
(defense, healthcare, education, foreign aid,
infrastructure)

44. Deficit Spending
• Deficit- the difference
between what you spend and
what you take in during one
year
• Debt- the total accumulation
of previous deficits ( total
money owed from borrowing)
• So the national debt is the
total of all of America’s
previous deficits
• Deficit spending- when the
government consistently
spends more than it takes in

45. Why does America love to deficit spend??
• Mandatory transfer
payments to Baby
Boomer’s (we have to)
• Economic stimulus
• To protect ourselves
(national defense)
• Habit—it’s easy!

46. What are the effects of deficit spending?
• Rapidly skyrocketing national debt
• Inflation
• High tax burden = discouraged citizens
• Crowding out effect-
• Unease about foreign owned debt

48. Major Economic Theories:
• 1. Classical Economics- an economic philosophy that
focused on how free markets and market economies
work; it held that capitalism was self-regulating and
required few government controls
• Founder: Adam Smith
• Legacy: Dominated economic thinking until the Great Depression
of the 1930s

49. • 2. Keynesian economics- a school of thought holding
that government intervention in the economy is necessary
to ensure economic stability
• Founder: John Maynard Keynes
• Legacy: Has dominated economic thinking since the Great
Depression

50. • 3. Monetarism- a school of thought which holds that
changes in the money supply are the main cause of
inflation and of economic expansions or contractions
• Founder- Milton Friedman
• Many economists admit the Fed
should have done more to prevent the
Great Depression by expanding the
money supply to increase spending
and lead to expansion!

51. • Demand side economics- ensure
economic growth by stimulating
demand by putting more money in
the hands of consumer (increase
spending or cut taxes)
• **Bigger gov’t role in the economy!
• Supply side economics- ensure
economic growth by stimulating
overall supply by cutting taxes on
businesses and high-income
taxpayers; producers and investors
will use their tax savings to expand
production and thereby stimulate
the economy
• ***Smaller gov’t role in the economy!