Title: Unit 5: Money & The Economy (Teacher Only)
Course: Kentucky Sample Personal Finance Curriculum > Section: Unit 5: Money & The Economy

Description
Money is a tool to facilitate trade. The economy is the totality of our trade interactions. In this unit students will learn the key functions of money, how financial intermediaries work to connect savers and borrowers, and how the forces of supply and demand set prices.

Governments play an important role in the economy. In this unit students will learn about how fiscal policy is used to manage the economy and will identify the different social safety nets and regulatory agencies that have been established.

Talking Points

1. Money is anything widely accepted as final payment for goods and services. Money (currency or coin) is a tool used to ease and facilitate trade.
2. Money encourages specialization by reducing the costs of exchanging goods and services. Societies have used may things as money, including stones, shells, elephant-tail bristles, furs, salt, tobacco, whatles’ teeth, gold and silver, and pieces of paper.
3. Money is used to facilitate trade by serving three key functions:

- Medium of exchange: Money allows people to buy and sell goods and services while avoiding the problems of barter. Sellers are willing to accept money in exchange for their goods and services. Money, in its medium of exchange function makes trade happen faster and in greater volume than a barter-only economy.
- Unit of Measure or Account: Money allows people to establish prices that everyone can understand. With prices denominated in money, people can make more informed purchasing decisions as they compare prices among different goods and services.
- Store of Value: Money holds purchasing power for future use.

4. Inflation is an increase in the average level of prices across an economy. Inflation reduces the value of money—it’s purchasing power. When prices across the economy are rising, each dollar can buy fewer goods and services. Disinflation is a reduction in the level of inflation.

5. Financial Intermediaries act as a “middleman” between savers and lenders. The most prevalent example of a financial intermediary is a bank or credit union where deposits (from savers) are used to make loans (to borrowers.) However, capital markets are also intermediaries.

6. Banks connect people who want to borrow with those who have savings to lend.

7.Governments use taxes to generate revenue to provide public goods and services such as roadways, park lands, and security services, to transfer payments from one group to another (e.g. social security payments from those working to those not working), and to operate the government.

8. When Congress and the President use spending and taxation to try and manage the economy, they are conducting fiscal policy. If the economy experiences a slowdown, Congress and the President can initiate active fiscal policy by changing tax policy and spending laws in an effort to have a positive influence on the economy. While economists and politicians may disagree on the proper approach to take, almost all agree that economic growth is desirable because it leads to higher levels of employment and increasing incomes. An economy is expanding when it is growing and contracting when it is getting smaller.

9. Congress and the President can also use taxation to encourage or discourage certain behavior. For example, to encourage consumers to purchase electric cars, they may offer a tax break for doing so. They can also discourage consumers from buying certain products by increasing the tax paid on those produces (e.g. cigarettes).

10. Prices for most goods and services are determined in markets by supply and demand. A market exists when and where buyers (consumers) and sellers (producers) come together to exchanges goods, services, and/or resources. Markets bring buyers (the demanders) and sellers (the suppliers) together. As buyers and sellers interact, they determine prices in the market.

11.The buyers in a market form the demand side of the market. Demand is the quantity of a good or service that buyers are willing and able to buy at all possible prices during a certain time period. To understand demand, you need to understand the behavior of buyers. In most cases, people behave consistently with the law of demand, which says, as the price of a good or service increases, the quantity demanded of that good or service falls—that is—people buy less of it.

12. The sellers in a market form the supply side of the market. Supply is the quantity of a good or service that producers are willing and able to sell at all possible prices during a certain time period. To understand supply, you need to understand the behavior of sellers (producers). In most cases, sellers behave consistently with the law of supply, which states that as the price of a good or service increases, the quantity supplied of the good or service increases. Likewise, as the price of a good or service decreases, the quantity supplied of that good or service decreases.

13.Prices act as a signal to both producers and consumers about how scarce resources should be allocated. Higher prices represent higher potential profits to a producer signaling them to allocate more resources into producing those products. When products aren’t selling at current prices, this can be a signal to producers to lower prices and to not produce as much in the future. Consumers on the other hand want lower prices so that they can make more purchases. When prices of a good or service begin to increase, some consumers will stop purchasing the good or service. They might substitute a less expensive product.

14. When supply and demand are in balance meaning that all the units produced are consumed (purchased) economists call that equilibrium or market equilibrium. The market will find equilibrium on its own as consumers and producers negotiate the price of products over time.

15. Some government-benefit programs provide a social safety net to protect individuals from economic hardship or loss caused by unexpected events. These include government transfer programs such as Social Security disability benefits, unemployment insurance, workers’ compensation, Medicare, and Medicaid.

16.Regulatory agencies are established by Congress with the President to oversee, monitor, set, and enforce standards over different areas. Each has a specific mission and authority defined by law.

FL.H.18 Identify the role of financial intermediators in the economy (i.e., facilitates exchange between savers and lenders).

FL.H.19 Explain how government uses taxation to generate revenue, manage the economy and discourage/encourage certain behaviors.

FL.H.20 Explain that markets determine prices and allocate scarce goods and services through the forces of supply and demand.

FL.H.21 Explain the role of the government in administering social insurance programs such as unemployment, workers’ compensation, Medicare, Medicaid and Old-Age, Survivors and Disability Insurance (OASDI), otherwise known as Social Security.

FL.H.22 Identify the role of regulatory agencies, e.g.:

- Federal Reserve
- Federal Deposit Insurance Corporation (FDIC)
- National Credit Union Administration (NCUA)
- Federal Trade Commission (FTC)
- Securities and Exchange Commission (SEC)
- Financial Industry Regulatory Authority (FINRA)
- Internal Revenue Service (IRS)
- State regulatory agencies