1. Personal Finance Economics
Unit 5: Chapters 8-11
Personal Finance Economics
Unit 2: Chapters 10-11

2. Essential Questions
1) How will varying degrees of knowledge, skills and abilities affect earnings?
2) How are banks and financial institutions important to the economy?
3) How do changes in tax rates and interest rates respectively affect individual’s spending and saving behavior?
4) How can the use of credit impact personal financial health?
5) Why do individuals carry different types of insurance?

3. Labor Civilian Labor Force (CLF)
Men and women 16 and up not in the military, prison, or otherwise institutionalized who are working or actively looking for a job.
Who does this not include?
The number of people in the CLF is determined by the Bureau of Labor Statistics (BLS)
They also determine the unemployment rate
Good rate = 4-6%
Current Rate?

4. Types of Labor Unskilled Semi-Skilled Skilled Professional
Lack training to operate specialized machines
“ditch diggers”
Semi-Skilled
Workers with some mechanical skills
Floor polisher, cashier
Skilled
Operate complex equipment
Carpenters, computer technicians, crane operators
Professional
Higher level skills
Doctors, lawyers, engineers, teachers
No level competes with any other
People tend to stay at the same level their whole lives
Cost of education and training
Lack of opportunities
Lack of initiative

5. Supply and demand of each level determines wages
Could also be caused by
Learning Effect
Education increases productivity, leading to higher wages
Screening Effect
College degree means that employee must be intelligent or hard working. Thus, he/she should receive a higher wage

6. Wage Determination Theories Traditional Theory of Wage Determination
Based on supply and demand
People will be paid the equilibrium wage rate
Exceptions: racism, sexism, uninformed buyers and sellers
Theory of Negotiated Wages
Good negotiators may get better than equilibrium price
Unions
Strikes, pickets, and boycotts
Employer strategies: lockout or a company union

7. Wage Determination cont.
Regional wage differences
Higher supply or demand in certain regions
Cost of living
Location: attractive?
Wage between genders and race
“Glass Ceiling”
Barrier that prevents minorities and women from advancing
Ways to get around it
Comparable Worth
The idea that some jobs in society have equal value and should receive equal pay
Set Aside Contracts
The government can give a certain percentage of contracts to businesses owned by women and minorities.
Both the problems and the solutions violate laws of economics and lead to inefficiencies in the market for labor.
Gender gap reading

8. Savings Disposable Income = Consumption + Savings
The absence of spending
For investment to occur, people must save
Investing
The act of redirecting resources from being consumed today so that they may create benefits in the future.
Saving = Investing
How does a bank make money?
Banks lend saved funds and charge a higher interest rate on loans that they do on savings.

9. Financial System
The financial system is a way to transfer savers’ dollars to investors.
When you save, you receive a receipt called a financial asset. Ex. Bond, bank statement
Financial assets are claims on the property and income of the borrower. Savers use these to prove a payment is expected if the borrower defaults on a loan.
Households and businesses provide some funds directly to borrowers through bonds, but mostly they supply funds through financial intermediaries.
Financial intermediaries are institutions such as banks, life insurance companies, and pension funds.
Financial intermediaries Handout
Money is then loaned to borrowers

10. The Financial System
The financial system matches one person’s saving with another person’s investment.
It moves the economy’s scarce resources from savers to borrowers.
We must have savers in order to borrow

11. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY
The financial system is made up of financial institutions that coordinate the actions of savers and borrowers.
Helps address 3 problems
Transaction costs
Makes it easier for savers to find borrowers
Risk
Reduces risk by making it easier to diversify
Provides liquidity
Provides access to cash for borrowers
Assets VS Liabilities
Financial institutions can be grouped into two different categories: financial markets and financial intermediaries.

12. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY
Financial Markets
Stock Market
Bond Market
Financial Intermediaries
Banks
Mutual Funds

13. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY
Financial markets are the institutions through which savers can directly provide funds to borrowers.
Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers.

14. Financial Markets IOU The Bond Market
A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond.
Characteristics of a Bond
Term: The length of time until the bond matures.
Credit Risk: The probability that the borrower will fail to pay some of the interest or principal.
Tax Treatment: The way in which the tax laws treat the interest on the bond.
Municipal bonds are federal tax exempt.

15. Financial Markets Federal Bonds Bond Prices
Issued by the US government to finance debt
Loans to the US government
Bond Prices
Interest rates and prices go in opposite directions.

16. Financial Markets The Stock Market
Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that the firm makes.
The sale of stock to raise money is called equity financing.
Compared to bonds, stocks offer both higher risk and potentially higher returns.
The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

17. Financial Intermediaries
Banks
take deposits from people who want to save and use the deposits to make loans to people who want to borrow.
pay depositors interest on their deposits and charge borrowers slightly higher interest on their loans.
Banks help create a medium of exchange by allowing people to write checks against their deposits.
A medium of exchanges is an item that people can easily use to engage in transactions.

18. Financial Intermediaries
Mutual Funds
A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio, of various types of stocks, bonds, or both.
They allow people with small amounts of money to easily diversify.

19. Financial Intermediaries
Other Financial Institutions
Credit unions
Pension funds
Insurance companies