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WHAT?: One of three basic questions of allocation (the other two are How? and For Whom?). Answering the 'What?' question of allocation determines the types and quantities of goods and services produced with society's limited resources. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? The production possibilities analysis sets the stage for answering the 'What?' question.

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Lesson 19: Money Creation | Unit 2: Fred Returns Page: 6 of 23

Topic: Currency <=PAGE BACK | PAGE NEXT=>

Our honest and trustworthy Fred discovers paper currency.

Fred's system:

  • Fred tracks gold deposits and withdrawals by issuing receipts for each deposit.
  • Fred returns the gold in exchange for a receipt.Three features:
  • First: The knight need not, and probably does not, withdraw the same gold deposited.
  • Second: Fred need not personally know each knight requesting services.
  • Third: Gold receipts are as good as gold, because people know the receipts can be redeemed for gold.Therefore:
  • Gold receipts become money for the local economy.
  • Fred has discovered paper currency, fiat money, and what is comparable to the checkable deposit function of modern banks.

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AGGREGATE SUPPLY SHIFTS

Changes in the aggregate supply determinants shift both the short-run aggregate supply curve and the long-run aggregate supply curve. The mechanism is comparable to that for market supply determinants and market supply. There are two options--an increase in aggregate supply and a decrease in aggregate supply. An increase in resource quantity or quality or a decrease in resource price shifts one or both of the aggregate supply curves to right. A decrease in resource quantity or quality or an increase in resource price shifts one or both of the aggregate supply curves to left.

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Today, you are likely to spend a great deal of time flipping through mail order catalogs seeking to buy either a wall poster commemorating Thor Heyerdahl's Pacific crossing aboard the Kon-Tiki or decorative garden figurines. Be on the lookout for cardboard boxes.
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The 22.6% decline in stock prices on October 19, 1987 was larger than the infamous 12.8% decline on October 29, 1929.
"The roots of education are bitter, but the fruit is sweet."

-- Aristotle, philosopher

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