However they can now purchase them meaning more people are specialized in a

However they can now purchase them meaning more

This preview shows page 13 - 15 out of 15 pages.

However, they can now purchase them, meaning more people are specialized in a specific area and society is more productive. Anything used as money must serve four core functions: 1. Must act as a medium of exchange 2. Must serve as a unit of account 3. Must serve as a store of value 4. Must offer a standard of deferred payment Criteria for money: 1. Acceptable 2. Standardized quality 3. Durable 4. Valuable 5. Divisible Federal Reserve – Central bank of the United States Fiat Money – Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money It’s not a law that people/firms accept money Some places may only accept credit cards or bills under $20, etc. Key to acceptance : Households and firms have confidence that if they accept paper dollars in exchange for goods/services, the dollars will not lose much value during the time that they hold the,. o Part B: Your Retirement Traditional Employer Pension Plans – The employer sets funds aside for, manages, and pays for retirement until death This isn’t likely to happen for our generation “Save early and often”
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Most employers offer “defined contribution” plans 401 (k) 403 (b) 457 (IRS Code) You pay income taxes when funds are withdrawn at retirement; You select how much goes in; You select the assets that your contributions go into o Part C: How the Federal Reserve affects the economy Independence: Largely independent of government Doesn’t get government funding Top officials: Presidential appointees and confirmed by Senate Open Market Operations – The Fed buying/selling bonds Basically, the Federal Reserve can change the interest rate o Part D: Quantity Theory of Money Irving Fisher’s Quantity Equation M x V = P x Y M – Money Supply; V – Velocity; P – Price level; Y – Real Output Velocity of Money – Average number of times each dollar in the money supply is used to purchase goods/services in GDP (usually just called velocity ) V = (P x Y)/M In 2012, V was 7.0, meaning that the average dollar was spent 7 times that year Quantity Theory of Money A theory about the connection between money and prices that assumes that the velocity of money is constant M x V = P x Y can be transformed % Change in M + % Change in V = Inflation Rate + % Change in Y So, Inflation Rate = % Change in M + % Change in V - % Change in Y Predictions: 1. If money supply grows faster than GDP, there is inflation 2. If GDP grows faster than money supply, there is deflation 3. If they both grow at a constant rate, there is neither inflation or deflation The accuracy of the theory depends on whether or not velocity is constant Two ways to cut nominal spending M x V = P x Y Over time, V is fairly constant, so Inflation Rate = % change M x % change Y In order to combat inflation, the Fed will raise the interest rate to decrease spending o Part E: Fiscal Policy Fiscal Policy – Changes in the federal taxes and purchases that are intended to achieve
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