Download Economics New Ways of Thinking Guided Reading and Study Guide Workbook PDF

TitleEconomics New Ways of Thinking Guided Reading and Study Guide Workbook
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000094 Econ Sampler.qxd 2/15/06 2:47 PM Page 35

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1© EMC Publishing Guided Reading and Study Guide

Outlining Activity

Look through the chapter for an overview of the material. Pay attention to the main topics in the
book. As you scan each section of the book, fill in the missing words in the following outline.

I. Scarcity Exists

A. People have unlimited ______________________—things they desire to have.

B. Resources are needed to produce the goods and services that people want.

C. The resources available to satisfy our wants are limited. This condition is called


II. Scarcity Means Making Choices

A. Scarcity exists because wants are unlimited and resources are limited.

B. Without enough resources to satisfy all of our wants, we must ______________________ which

wants we will satisfy.

III. Making Choices Means Incurring Opportunity Costs

A. Every ______________________ we make has an opportunity cost.

B. ______________________ cost is the most valued alternative you give up to do something.

C. A trade-off is another way of thinking about an opportunity cost. A trade-off means that you

can get more of one good only by giving up another good.

IV. One Diagram, Three Economic Concepts

A. A(n) ______________________ possibilities frontier (PPF) shows all possible combinations of

two goods that an economy can produce in a certain time period. (See Exhibit 1-2 on page 10 of

your textbook.)

B. The PPF tells us that certain things are available to us and certain things are not.

C. The points on the PPF and below it represent what is available to us. The points beyond the PPF

represent what is unavailable to us.

D. The PPF, then, illustrates scarcity by showing us that we can’t have everything we want.

Name: ____________________________________________________ Date: ____________________

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Just the Facts Handout

What’s It Like Living in a Barter Economy?

A barter economy is an economy with no money. The only way you can get what you
want in a barter economy is to trade something you have for it. Living in a barter econ -
omy is difficult because many of the people you want to trade with don’t want to trade
with you.

In this situation, trade is time consuming. Economists state the problem this way:
the transaction costs of making exchanges are high in a barter economy. Think of
transaction costs as the time and effort you have to spend before you can make an

How and Why Did Money Come to Exist?

When a good is widely accepted in exchange, the good is called money. Money is any
good that is widely accepted in exchange and in the repayment of debts. Historically,
goods that evolved into money included gold, silver, copper, rocks, cattle, and shells.

What Gives Money Value?

Our money has value because people generally accept it. Money has value to you
because you know that you can use it to get what you want. However, you can use
money to get what you want only because other people will accept it in exchange for
what they have.

Are You Better Off Living in a Money Economy?

The transaction costs of exchange are lower in a money economy than in a barter econ -
omy. In a barter economy, not everyone you want to trade with wants to trade with you.
In a money economy, everyone you want to trade with wants what you have—money.
In short, transaction costs are lower when others are willing to trade with you.

Lower transaction costs mean that you need less time to trade. Using money frees
up some time for you. With that extra time, you can produce more of whatever you
produce, consume more leisure, or do both. In a money economy, people produce more
goods and services and consume more leisure than they would in a barter economy.
People who live in money economies are richer in goods, services, and leisure than the
residents of barter economies.

People who live in money economies also do more specialized work because
transaction costs are low. Instead of spending time bartering, they can focus on produc -
ing one thing. They can then sell that one thing for money, and use the money to buy
other goods and services.

What Are the Three Functions of Money?

Money has three major functions. It serves as
1. a medium of exchange;
2. a unit of account; and
3. a store of value
A medium of exchange is anything that is generally acceptable in exchange for goods

153© EMC Publishing Guided Reading and Study Guide

Name: ____________________________________________________ Date: ____________________

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154 CHAPTER 10, SECTION 1 © EMC PublishingGuided Reading and Study Guide

and services. A unit of account is a common measurement used to express values.
Money functions as a unit of account because all goods can be expressed in terms of
money. A good is a store of value if it maintains its value over time. Money maintains
its value over time. For example, you can sell your labor services today, collect money in
payment, and spend the money on goods and services tomorrow.

Who Were the Early Bankers?

When money was principally gold coins, carrying it was neither easy nor safe. As a
result, people wanted to store their gold in a safe place. Most often, people stored their
gold coins with goldsmiths because goldsmiths had safe storage facilities. Goldsmiths
were the first bankers.

Goldsmiths gave their customers warehouse receipts stating the amount of gold
stored. People began to use the warehouse receipts in place of the actual gold coins
because it was easier to do so. In this way, warehouse receipts were used as money. At
this stage, warehouse receipts were fully backed by gold. The receipts simply represented
the actual stored gold.

Then, some goldsmiths began to lend out some of the gold they were storing, and
collected interest on the loans. However, instead of lending the actual gold, the gold -
smiths gave warehouse receipts to the borrowers. As a result, there were more receipts
than there was actual gold.

The goldsmiths� lending activity increased the supply of money. That is, it increased
the number of warehouse receipts compared with the actual amount of gold. This
process was the beginning of fractional reserve banking. Under fractional reserve
banking, banks are like the goldsmiths of years past. They hold only a fraction of their
deposits and lend out the remainder.

Answer questions 1–4 in the Section 1 Assessment on page 262 of your textbook.

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306 CHAPTER 16 © EMC PublishingGuided Reading and Study Guide

7. If the annual coupon payment is $20 and the price paid for the bond is $3,240, what will the

bondholder receive in the year the bond matures?

a. $3,220
b. $3,260
c. $3,240
d. $20

8. Which of the following is a bond issued by the federal government?

a. corporate bond
b. Treasury option
c. Treasury bill
d. coupon rate

9. The rate of return that a person would receive if the person bought a bond today at its ask price and

held it until it matured is which of the following?

a. Treasury option
b. yield
c. Treasury bill
d. coupon rate

10. Which of the following would you purchase if you decided to “buy the market”?

a. dividends
b. mutual funds
c. Treasury bills
d. Spyders

Short Answer

Write your answers on the lines provided.

1. Explain what the PE ratio of a stock means.

2. Explain the main components of a bond.

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307CHAPTER 16© EMC Publishing Guided Reading and Study Guide

3. Where might a stock be sold?

4. Give some reasons why you might want to purchase a stock.

5. Why would a person be willing to enter into a futures contract with a corn farmer in which the
person agrees to buy all the farmer’s corn in two months at the current price?

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