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”
Most employers offer “defined contribution” plans 401 (k) 403 (b) 457 (IRS Code) You pay income taxes when funds are withdrawn at retirement; You select how much goes in; You select the assets that your contributions go into o Part C: How the Federal Reserve affects the economy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
You've reached the end of your free preview.
Want to read all 15 pages?