Money & Economics
What are the three functions of money?
Medium of exchange
Store of value
Unit of account
Consumers suddenly believe gasoline prices will rise next month. What happens to demand today?
Demand shifts right.
Banks pay interest to people who deposit money into savings accounts. Why are banks willing to pay people interest instead of simply holding the money for free?
Banks use deposited money to make loans to other customers. They earn more interest from those loans than they pay to depositors, allowing the bank to make a profit.
A student invests $500 in a company's stock.
What does purchasing a stock represent?
A. Lending money to the company
B. Owning part of the company
C. Buying the company's products
D. Depositing money into a savings account
B. Owning part of the company
A business sells 75 water bottles for $4 each.
What is the business's total revenue?
75 x 4 = $300
Your town switches from using gold coins to paper money backed only by the government's promise.
Fiat money
A hurricane destroys several oil refineries.
Draw or explain what happens to: Supply, Equilibrium price, Equilibrium quantity
Supply shifts left, Price increases, Quantity decreases
You borrow $12,000 at 6% simple interest for 4 years. Calculate the total amount of interest you will pay over the life of the loan.
The borrower pays $2,880 in interest.
An investor places all $20,000 of their savings into a single technology company.
Another investor places $20,000 equally into 20 different companies across several industries.
Which investor has lower risk, and why?
The second investor has lower risk.
You currently sell lemonade for $4 per cup and sell 500 cups per day.
Your cost to produce each cup is $1.50.
Sugar prices increase by 20%, raising your cost per cup to $1.80.
Your competitor lowers their price to $3.60.
Market research predicts:
If you keep your price at $4, you'll sell 550 cups.
If you lower your price to $3.60, you'll sell 650 cups.
If you raise your price to $4.40, you'll sell 450 cups.
Which strategy maximizes profit? Show your calculations.
Keep the price at $4.00 because it produces the highest daily profit of $1,210.
Two countries produce the same amount of goods. Country A doubles its money supply overnight while Country B does not. Which country is more likely to experience inflation, and why?
Country A because more money is chasing the same amount of goods.
The Federal Reserve lowers interest rates, making it cheaper for consumers and businesses to borrow money. How does this affect Aggregate Demand (AD)? What happens to the price level and real GDP in the short run?
Aggregate Demand shifts to the right.
Real GDP increases.
The price level increases.
Lower interest rates encourage spending and investment, increasing total demand throughout the economy.
You purchase the following items: Shoes: $84 , Hat: $26, Backpack: $65 , Sales tax is 8.5%.
Calculate the total amount you will pay after tax.
Subtotal: 84 + 26 + 65 = $175
Sales Tax: 175 × 0.085 = $14.88
Total: 175 + 14.88 = $189.88
An investment loses 20% of its value.
It originally was worth $1,000.
How much money is the investment worth now, and what percentage gain is required to return to $1,000?
The investment is worth $800 and must gain 25% to break even.
A business sells custom T-shirts.
Each shirt sells for $28.
Variable cost per shirt is $11.
Monthly fixed costs are $1,650.
The business sells 180 shirts this month.
Calculate: Total Revenue, Total Variable Costs, Total Expenses, and Profit
Revenue: 5,040
Variable Costs: 1,980
Total Expenses: 3,630
Profit: 1,410
The Consumer Price Index (CPI) was 250 last year and 260 this year. Calculate the inflation rate.
4% Inflation Rate
A major hurricane destroys factories, roads, and shipping ports throughout the country.
How does this affect the Short-Run Aggregate Supply (SRAS) curve? What happens to the price level and real GDP?
SRAS shifts to the left.
Price level increases.
Real GDP decreases.
The hurricane raises production costs and reduces the economy's ability to produce goods and services in the short run.
Two students each invest $10,000 at an annual interest rate of 8%.
Student A earns 8% simple interest for 12 years.
Student B earns 8% compound interest, compounded annually, for 9 years.
Calculate:
Student A's final balance.
Student B's final balance.
Which student has more money at the end of their investment?
Student A Final Balance: 19,600
Student B Final Balance: 19,990.05
Difference: 390.05 in favor of Student B
An investment account earns 8% this year.
During the same year, inflation is 3%.
Approximately what is the investor's real rate of return?
Approximately 5%
A business currently sells 300 products each month for $25 each.
Management is considering lowering the price to $22. They estimate sales will increase by 30%.
Assume production costs remain the same.
Calculate the revenue before and after the price change. Should the business lower the price if the goal is to maximize revenue?
Revenue: 7,500
Quantity: 350
New revenue: 8,580
Since $8,580 > $7,500, the business should lower the price if its goal is maximizing revenue.
A country experiences: Inflation of 12%, Wage growth of 4%
Are workers becoming richer or poorer in purchasing power? Explain.
Purchasing power decreases because prices rise faster than wages.
An economy experiences all of the following changes over the next 15 years:
Major investments are made in education and worker training.
Businesses build hundreds of new factories.
Technological innovations significantly improve productivity.
The labor force grows as the population increases.
How will these changes affect the Long-Run Aggregate Supply (LRAS) curve? Explain why each change contributes to the shift and identify what happens to the economy's potential (full-employment) real GDP.
LRAS shifts to the right.
Each event increases the economy's productive capacity:
Education and training improve human capital, making workers more productive.
New factories increase the economy's capital stock, allowing more goods and services to be produced.
Technological improvements increase efficiency and output per worker.
A larger labor force increases the number of workers available to produce goods and services.
Because the economy can produce more at full employment, potential (full-employment) real GDP increases.
Two students each invest $10,000 at an annual interest rate of 8%.
Student A earns 8% simple interest for 13 years.
Student B earns 8% compound interest, compounded annually, for 9 years.
Student A's final balance.
Student B's final balance.
Which student has more money at the end of their investment?
Student A Final Balance: 20,400
Student B Final Balance: 19,989.04
Student A wins by $411
Four investments have the following average annual returns over one year:
Savings Account: 2%
Corporate Bond: 5%
Index Fund: 10%
Individual Stock: -15%
An investor places $10,000 into each investment.
Which investment earned the most money after one year, and how much was each investment worth?
Savings Account: 10,200
Corporate Bond: 10,500
Index Fund: 11,000
Individual Stock: 8,500
Three competing businesses report the following information.
A: Revenue = 125,000 Expenses= 93,000
B: Revenue = 162,000 Expenses = 129,500
C: Revenue = 141,000 Expenses = 104,000
Part A: Calculate each company's profit.
Part B: Calculate each company's profit margin
Part C: Which company is the most profitable overall, and which company is the most efficient? Explain the difference.
Business A: Profit = 32,000 Profit Margin = 25.6%
Business B: Profit = 32,500 Profit Margin = 20.1%
Business C: Profit = 37,000 Profit Margin = 26.2%
Most profitable overall: Business C ($37,000 profit)
Most efficient: Business C (26.2% profit margin)