Standard and Essential Question

1. Standard and Essential Question • Standard -SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. • b. Explain the role of money and how it facilitates exchange. • Essential Questions- How does money facilitate exchange in the economy?

2. Money • Money- anything that serves as a medium of exchange, a unit of account, and a store of value • Three Uses of Money • Medium of Exchange- anything that is used to determine value during the exchange of goods and services • Barter- a method of exchanging one thing for another • Barter is still used in traditional economies • Barter is too time consuming and too difficult to be practical in large economies

3. Three Uses of Money Continued • Unit of Account- a means for comparing the values of goods and services • Store of Value- something that keeps its value if it is stored rather than used • Money keeps its value unless a country suffers inflation; this means it takes more money to purchase an item than it required at an earlier time

4. Six Characteristics of Money • Currency- coins and paper bills used as money; earlier societies used other objects as currency • Six Characteristics of Money • Durability- must be able to withstand the physical wear and tear that comes from being used over and over again • Portability- people must be able to easily transfer money from one person to another • Divisibility- money must be easily divided into smaller denominations

5. Six Characteristics of Money • Uniformity- money must be the same in terms of what it will buy; a $1 will always buy a $1 worth of goods • Limited Supply • Acceptability- people must recognize the dollar and accept it in exchange for goods

6. Sources of Money’s Value • Money is paper and metal, so what makes it valuable? • Commodity Money- objects that have value in themselves and that are also used as money • Examples: salt, cattle, and precious stones • Commodity money is not portable, durable or divisible • Used in small economies and in the American colonies • Representative Money- objects that have value because the holder can exchange them for something else of value • Example: People carried around silver and gold receipts to show that they owned gold or silver • Used during the late colonial period and the early days of the United States

7. Sources of Money’s Value • Fiat Money- money that has value because the government has ordered that it is an acceptable means to pay debts • Also known as “legal tender” • Federal Reserve controls its supply • The control of the money supply is essential for a fiat system to work

8. Measuring the Money Supply • The money supply is all the money available in the United States economy. • M1 • M1 consists of assets that have liquidity, or the ability to be used as, or easily converted into, cash. • Components of M1 include all currency, traveler’s checks, and demand deposits. • Demand deposits are the money in checking accounts.

9. Measuring the Money Supply • M2 • M2 consists of all of the assets in M1, plus deposits in savings accounts and money market mutual funds. • A money market mutual fund is a fund that pools money from small investors to purchase government or corporate bonds.

10. Standard and Essential Question • Standard- SSEPF1 The student will apply rational decision making to personal spending and saving choices. • a. Explain that people respond to positive and negative incentives in predictable ways. • b. Use a rational decision making model to select one option over another. • c. Create a savings or financial investment plan for a future goal • Essential Question- How can rational decision making impact current spending and future investment decisions?

11. Rational Decision Making • Rational Decision making refers to the process by which rational consumers seeking their own happiness or utility will make choices. • Define range of options • Evaluate the costs, benefits, and trade-offs involved in each choice to reach a decision • Rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs

12. Saving and Investing • Investment- the act of redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit • Investing • Is an essential part of the free enterprise system • Promotes economic growth and contributes to a nation’s wealth

13. Standard and Essential Question • Standard- SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. • Essential Question- How do the various services offered at financial institutions compare in terms of risk and return?

14. Banking Services • Banks perform many functions and offer a wide range of services to consumers. • Storing Money • Banks provide a safe, convenient place for people to store their money. • Credit Cards • Banks issue credit cards — cards entitling their holder to buy goods and services based on each holder's promise to pay.

15. Banking Services • Saving Money • Savings Accounts • Checking Accounts • Money Market Accounts • Certificates of Deposit (CDs) • Loans- By making loans, banks help new businesses get started, and they help established businesses grow. • Mortgage- a specific type of loan that is used to purchase real estate.

16. How Banks Make a Profit The largest source of income for banks is the interest they receive from customers who have taken loans. Interest is the price paid for the use of borrowed money. How Banks Make a Profit Money leaves bank Interest and withdrawals to customers Money enters bank Deposits from customers Money loaned to borrowers: • business loans •home mortgages • personal loans BANK Interest from borrowers Fees for services Bank’s cost of doing business: • salaries • taxes • other costs Bank retains required reserves

17. Types of Financial Institutions • Commercial Banks • Commercial banks offer checking services, accept deposits, and make loans. • Savings and Loan Associations • Savings and Loan Associations were originally chartered to lend money for home-building in the mid-1800s. • Savings Banks • Savings banks traditionally served people who made smaller deposits and transactions than commercial banks wished to handle.

18. Credit Unions • Credit unions are cooperative lending associations for particular groups, usually employees of a specific firm or government agency. • Finance Companies • Finance companies make installment loans to consumers.

19. Electronic Banking The role of computers in banking has increased dramatically. Automated Teller Machines (ATMs) Customers can use ATMs to deposit money, withdraw cash, and obtain account information. Debit Cards Debit cards are used to withdraw money directly from a checking account. Automatic Clearing Houses (ACH) An ACH transfers funds automatically from customers' accounts to creditors' accounts. Home Banking Many banks allow customers to check account balances and make transfers and payments via computer. Stored Value Cards Stored value cards are embedded with magnetic strips or computer chips with account balance information.

20. Financial System • Financial System- the system that allows the transfer of money between savers and borrowers • When people save they are lending funds to others • Financial Assets- claim on the property or income of a borrower

21. Financial Intermediaries Savers make deposits to… Financial Institutions that make loans to… Investors Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Life insurance companies Mutual funds Pension funds Finance companies The Flow of Savings and Investments Financial intermediaries accept funds from savers and make loans to investors.

22. Financial Intermediaries • Financial Intermediaries- institution that helps channel funds from savers to borrowers • Banks • Savings and Loan Associations • Credit Unions • Finance Companies • Mutual Funds- fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets • Life Insurance- bought by working members of families; used to make up for lost income if they die; companies lend part of premiums to investors • Pension Fund

23. Advantages of Financial Intermediaries • Sharing Risks- allows your money to be pooled with other investors • Diversification- spreading out investments to reduce risk • Provide Information • monitor income and spending of borrowers • Knows how stocks in their portfolios (collection of financial assets) are doing • Provide this information to potential investors in a prospectus (an investment report to potential investors) • Provide Liquidity- allows investors to convert assets to cash

24. Risk, Liquidity, and Return • Investments that are considered to be safe usually have a lower return (the money an investor receives above and beyond the sum of money initially invested) • The riskier the investment the higher the return; however there is a greater chance you will lose your money

25. Bonds and Other Financial Assets • Bonds- Certificates sold by a company or government to finance projects or expansion (like an IOU) • Pay the investor a fixed amount of interest • Lower Risk investments • 3 Components of Bonds • Coupon Rate- the interest rate that a bond issuer will pay to a bondholder • Maturity- the time at which payment to a bondholder is due • Par Value- the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity • Yield- the annual rate of return on a bond if the bond were held to maturity

26. Buying Bonds at Discount • Discount from par- paying less than par- this occurs because interest rates are not stable • Bond Ratings • Standard and Poor’s and Moody’s are two firms that rate bonds • Factor s that determine bond ratings • Issuer’s ability to make future interest payments • Ability to repay the principal when the bond matures • The higher the rating the lower the risk and the lower the interest rate a company has to pay on a bond

27. Advantages and Disadvantages to the Issuer • Once the bond is sold the coupon rate will not go up and down • Bondholders do not own part of the company and the issuer does not have to share profits with them • Must make fixed interest payments even in bad years • Firms must maintain financial health so they do not receive a lower bond rating

28. Types of Bonds Savings Bonds • Savings bonds are low-denomination ($50 to $10,000) bonds issued by the United States government. Savings bonds are purchased below par value (a $100 savings bond costs $50 to buy) and interest is paid only when the bond matures. Treasury Bonds, Bills, and Notes • These investments are issued by the United States Treasury Department. Municipal Bonds • Municipal bonds are issued by state or local governments to finance such improvements as highways, state buildings, libraries, and schools.

29. Types of Bonds Continued Corporate Bonds • A corporate bond is a bond that a corporation issues to raise money to expand its business. Junk Bonds • Junk bonds are lower-rated, potentially higher-paying bonds.

30. Mutual Fund and IRAs • Mutual Fund • established to invest many people’s money in many firms • Best to diversify • Individual Retirement Account (IRA) • Allows you to build wealth and retirement security • May contribute $4,000 per year • 401(k)- another retirement savings account • Employees deduct a portion of their earning before taxes • Must pay taxes when money is withdrawn • Money withdrawn prior to 59 ½ is subject to a penalty

31. Buying Stock • Corporations can raise money by issuing stock, which represents ownership in the corporation. A portion of stock is called a share. Stocks are also called equities. • Stockowners can earn a profit in two ways: 1. Dividends, which are portions of a corporation’s profits, are paid out to stockholders of many corporations. The higher the corporate profit, the higher the dividend. 2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

32. Types of Stock Dividend Differences • Income stock pays dividends at regular times during the year. • Growth stock pays few or no dividends. Instead, the issuing company reinvests earnings into its business. Decision-Making Differences • Investors who buy common stock are voting owners of the company. • Preferred stock owners are nonvoting owners of the company, but receive dividends before the owners of common stock.

33. Stock Splits and Stock Risks Stock Splits • A stock split is the division of a single share of stock into more than one share. • Stock splits occur when the price of a stock becomes so high that it discourages potential investors from buying it. Risks of Buying Stock • Purchasing stock is risky because the firm selling the stock may encounter economic downturns that force dividends down or reduce the stock’s value. It is considered a riskier investment than bonds.

34. Stock Exchanges The New York Stock Exchange (NYSE) • The NYSE is the country’s largest stock exchange. Only stocks for the largest and most established companies are traded on the NYSE. NASDAQ-AMEX • NASDAQ-AMEX is an exchange that specializes in high-tech and energy stock. The OTC Market • The OTC market (over-the-counter) is an electronic marketplace for stock that is not listed or traded on an organized exchange. Daytrading • Daytraders use computer programs to try and predict minute-by-minute price changes in hopes of earning a profit.

35. How Stocks Are Traded • A stockbroker is a person who links buyers and sellers of stock. • Stockbrokers work for brokerage firms, or businesses that specialize in trading stock. • Some stock is bought and sold on stock exchanges, or markets for buying and selling stock.

36. Futures and Options • Futures are contracts to buy or sell at a specific date in the future at a price specified today. • Options are contracts that give investors the option to buy or sell stock and other financial assets. There are two types of options: 1. Call options give buyers the option to buy shares of stock at a specified time in the future. 2. Put options give buyers the option to sell shares of stock at a specified time in the future.

37. Measuring Stock Performance Bull and Bear Markets • When the stock market rises steadily over time, a bull market exists. Conversely, when the stock market falls over a period of time, it’s called a bear market. Stock Performance Indexes • The Dow Jones Industrial Average • The Dow is an index that shows how stocks of 30 companies in various industries have changed in value. • The S & P 500 • The S & P 500 is an index that tracks the performance of 500 different stocks.

38. The Great Crash Causes of the Crash • Many ordinary Americans were struggling financially: many purchased new consumer goods by borrowing money. • Speculation, or the practice of making high-risk investments with borrowed money in hopes of getting a big return, was common. Effects of the Great Crash • The Crash contributed to a much wider, long-term crisis — the Great Depression during which many people lost their jobs, homes, and farms. • Americans also became wary of buying stock. As recently as the early 1980s, only about 25 percent of households in the United States owned stock. The collapse of the stock market in 1929 is called the Great Crash.

39. Standard and Essential Question • Standard- SSEPF3 The student will explain how changes in monetary and fiscal policy can have an impact on an individual’s spending and saving choices. • a. Give examples of who benefits and who loses from inflation. • b. Define progressive, regressive, and proportional taxes. • c. Explain how an increase in sales tax affects different income groups.

40. Inflation • Inflation- A general increase in prices • Who do you think benefits if prices go up? • Who do you think loses if prices go up?

41. Tax Bases • Tax Base- the income, property, good or service that is subject to a tax • Individual Income Tax- a tax on a person’s income • Sales Tax- a tax on the dollar value of a good or service being sold • Property Tax- a tax on the value of property • Corporate Income Tax- a tax on the value of a company’s profits

42. Tax Structures

43. Characteristics of a Good Tax • Simplicity- easily understood • Efficiency- easy to collect; not too costly • Certainty- clear when a tax is due, how much is due, and how it should be paid • Equity- fair • Determining Fairness • Benefits-Received Principle- a person should pay taxes based on the level of benefits he or she expects to receive (drive- pay gas tax) • Ability to pay principle

44. Standard and Essential Question • Standard- SSEPF4 The student will evaluate the costs and benefits of using credit. • a. List factors that affect credit worthiness. • b. Compare interest rates on loans and credit cards from different institutions. • c. Explain the difference between simple and compound interest rates. • Essential Question- How can credit be both beneficial and harmful to a person?

45. Credit • Credit- the ability of a consumer to obtain goods or services before payment, based on an agreement to pay later • Interest- the price of using someone else’s money • Credit is an unsecured loan- the loan is not backed with collateral (property required by a lender and offered by a borrower as a guarantee of payment on a loan)

46. Credit • The Bright Side of Credit • Credit means obtaining the use of money that you do not have • Helps people acquire assets (homes and post-secondary ed. are assets) • Credit can help people in an emergency • Using credit allows you to use a good or service today and pay for it later • The Dark Side of Credit • Mistakes in using too much credit in relation to your income can be hard to recover from • Missing payments or defaulting on loans may keep you from obtaining credit in the future

47. Credit • Factors that affect credit worthiness • Character • Capacity • Collateral

48. Credit • Lenders look for the “Three Cs” (Character, Capacity, Collateral) when they approve a loan to an individual • Character- Is the applicant responsible? • Have you used credit before? • Do you have pay bills on time? • Do you have a good credit report? • Can you provide character references? • How long have you lived at your present address? • How long have you been at your present job?

49. Capacity- Does the applicant have enough discretionary income to make the payments on the loan? • Do you have a steady job? • What is your salary? • How reliable is your income? • Do you have other sources of income?

50. Collateral- Will the loan be secured, or guaranteed by collateral that can be used to repay the debt in case the borrower defaults on the loan? • Do you have a checking account? • Do you have a savings account? • Do you own any stocks or bonds? • Do you have any valuable collections or jewelry? • Do you own your own home? • Do you own a car? • Do you own a boat?