Econ Unit 4

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Money

Anything that can be used as a medium of exchange, has a store of value, and a unit of account.

Medium of Exchange

Used as an intermediary between buyers and sellers during the exchange of goods and services.

Bartering

Exchanging goods and services in exchange for other goods and services. Still an option sometimes, but in specialized economies, it is too difficult and time-consuming.

Unit of Account

The ability to express the value of something and compare similar items. Something could be “cheap” or “expensive”, based on its unit of account.

Store of Value

Money holds its value over time (Inflation will devalue money over time)

Characteristics of money (why) DPDUAS

Durable, Portable, Divisible, Uniform, Acceptable, and Scarce.

Who is in charge of the money supply?

The federal reserve

Fiat Money

Money that only has value because the government says it does.

Ex:) Dollars, coins, debit cards, credit cards, checks

Commodity Money

Objects with intrinsic value. (Value unto itself)

Ex:) Gold, silver, live stalk, land, real estate.

4 ways to spend money

1.) Own money on yourself (economize)

2.) Own money on others (economize but not as splurging)

3.) Someone else’s money on yourself (Still seek value, but not economizing)

4.) Other people spending other people’s money, on other people. (Government- not careful and no economizing)

Federal Reserve

The nation’s central banking system and authority.

What year was the Federal Reserve established?

1913 (before the great depression!)

How many federal banks does the federal reserve have?

12 (Arizona gets its money from the one in San Francisco!)

The Federal Reserve protects members’ bank deposits up to…

$250,000 per account. If a bank fails, your deposits are protected AND guaranteed by the government.

Bank Runs

During times of panic, people used to do bank runs to try to prevent people from trying to get their money before a tragedy. (Why the FDIC was made)

Money Supply (MS)

All of the currency in ACTIVE circulation. (Regulated by the Fed.)

M0

Complete liquidity - monetary base, physical cash (2.4 trillion worldwide), and band reserves.

M1

Very liquid: M0 + checking and savings accounts and money market accounts.

M2

Semi Liquid: M0 + M1 + short-term deposits (C.D.) certificate of deposits + money market fund. 22.67 trillion.

Who is the president of the Federal Reserve?

Jerome Powel

Liquidity

How easily an asset can be converted into cash. The most liquid asset is cash itself.

Functions of the FED

1.) Regulate money supply via monetary policy (Interest rates)

2.) Central bank, the bank that other banks go to for money. Called “the lender of last resort” (Bank to bank v.s. federal rate)

3.) Regulates banks and sets the rules they have to follow

4.) Clearing house for checks

Functions of banks

Store and save money (checking and savings)

CDs and mortgages (and low-reward) investment options like CDs and money market accounts

Loans (Fractional Reserve banking) 35% on house, get pre-approved!! (Business loans, cars, mortgages, credit cards)

Commercial banks even profit

Commercial Bank

Most are part of the Federal Reserve system

They are after profit!

Offer the most services (Checking, Savings, auto, etc.)

Provide Financial Investments (CDs, credit cards, and foreign exchange)

Insured by the FDIC up to $250,000!

Savings and loans

Primarily exists to offer savings deposits and home mortgages. Insured by the FDIC.

Credit Union

Smaller bank institutions that offer membership based on qualifications (Navy Federal, Desert Financial) offer many services of larger banks but with lower fees and higher savings rates. NCUA.

Fractional Reserve Banking

system where banks hold only a small fraction of customer deposits in reserve—to meet immediate withdrawals—and lend out the remainder, allowing them to create money by expanding credit. By lending, banks turn deposits into new loans, increasing the money supply and fueling economic activity.

Taxes

Required payment to local, state, and federal government

Tax base

The “what” that is being taxed

Ex:) Property, goods and services, income, etc.

Tax Structure

How the tax will be applied to the base

Progressive Tax

Tax rate increases as income increases (Income tax caps at 37%)

Flax/Proprietal Tax

Tax rate DOES NOT change based on income (sales tax is 5.6%)

Regressive Tax

Tax burden goes down the more you make. (Social security) Max taxable amount is 142,800 (6.2%)

Direct Taxes

Taxes paid directly to the government, such as income or property taxes

Indirect Taxes

Taxes that go to a 3rd party, then the government. (Sales tax)

With indirect taxes…

If demand is elastic, the business bears the tax hike majority. If inelastic then the consumer will.

Excise Tax

An extra tax on certain items used to influence consumption.

Ex:) “Sin” tax and other tax incentives. (Gas, cigarettes, alcohol)

The main goal of taxes is…

for revenue, but can also be used to influence people

Local Taxes

Sales, Property, and Excise

Federal Taxes

Income, Social Security, Medicare/Medicaid, Capital Gain

State Taxes

Sales, Income, Property, Corporate Taxes

Mandatory Spending

2/3rd’s of the budget, a payment required by law to entitlement programs such as social security, Medicare, welfare, pensions, etc.

Discressionary Spending

Government can choose how much to spend on defense, schools, research, housing, etc.

States with no sales tax

Alaska, Delaware, Montana, New Hampshire, Oregon

States with no income tax

Alaska, Florida, Texas, New Hampshire, South Dakota, Tennessee, Washington, Nevada, Wyoming

Income tax caps at…

37% or 523k (most people are in the 22% bracket or 40-80k)

Capital Gain Tax

federal tax levied on the profit (gain) made from selling an asset, such as stocks, bonds, real estate, or cryptocurrency, that has increased in value. It only applies when the asset is sold, not while it is held, and is based on the difference between the sale price and the original purchase price