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Money and Financial Institutions

Money and Financial Institutions. Chapter 12 pp. 174-189. Learning Objectives. After completing this chapter, you’ll be able to: Describe the functions and characteristics of money. Explain the services that banks offer.3. Name the types of banks.

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Money and Financial Institutions

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  1. Money and Financial Institutions Chapter 12 pp. 174-189

  2. Learning Objectives • After completing this chapter, you’ll be able to: • Describe the functions and characteristics of money. • Explain the services that banks offer.3. • Name the types of banks. 4. Identify the functions of the Federal Reserve System. Introduction to Business

  3. Why it’s Important Understanding the way money and financial institutions work is crucial to understanding the economy. Introduction to Business

  4. The History of Money 1. In the _____________ goods and services are indirectly exchanged using money, which can then be ________________________________. monetary system exchanged for other goods and services Introduction to Business

  5. The History of Money • 2. Money can be _____________ that people ___________________ for payment. • 3. In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money. anything accept as a standard Introduction to Business

  6. Figure 12.1 WOULD THESE ITEMS BE ACCEPTABLE AS MONEY? Imagine what business would be like without money. If you worked in a fast-food restaurant, it might pay you in food. Bartering is exchanging one product for another. American Colonialists engaged in this way of doing business. Explain why or why not these items could serve as money. Recreate this table and check the appropriate box(es) for each that applies. Introduction to Business

  7. The Functions of Money 4. The three basic functions of money are: • It is a medium of exchange • It is a standard of value • It is a store of value Introduction to Business

  8. Characteristics of Money 5. For money to carry out its functions, it must have several characteristics. Money must be: • Stable in value • Scarce • Accepted • Divisible into parts • Portable and durable Introduction to Business

  9. Graphic Organizer Graphic Organizer Functions and Characteristics of Money FUNCTIONS CHARACTERISTICS • Stable • Scarce • Accepted • Divisible • Portable • Durable • Medium of exchange • Standard of value • Store of value Introduction to Business

  10. Fast Review • What is the monetary system? • How is money a standard of value? Goods and services are exchanged indirectly using money, which can then be exchanged indirectly using money,, which can then be exchanged for other goods and services. It is used as a fixed means of measuring and comparing the values of different goods and services. Introduction to Business

  11. Fast Review • What are some of the characteristics money must have to be useful? Acceptability, portability, durability, divisibility, stability, difficult to counterfeit Introduction to Business

  12. Banking 6. The ________________ is the main type of financial institution, or organization for ________________, in our economy. banking system managing money Introduction to Business

  13. Storing Money bank account • A ______________ is a record of how much money a customer has ____________________________. • The money put in a bank is called a _____________. • The money taken out of a bank is called a ________________. . put into or taken out of a bank deposit withdrawal Introduction to Business

  14. Storing Money Checking accounts 10. __________________ are used for storing money in the _____________ so you can draw on it easily if you want to go shopping or pay a bill 11. ______________ accounts are used for storing money over a _____________ of time. short term . Savings long period Introduction to Business

  15. Storing Money Interest 12. _____________is a rate the _________________________________. If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year bank pays you for keeping your money there . Introduction to Business

  16. Business Building Blocks Understanding Interest Simple interest, compounded annually, is a percentage of the amount borrowed. The amount borrowed is called the principal. Compound interest may be compounded daily, monthly, or yearly. continued Introduction to Business

  17. Business Building Blocks How to Compute Interest Simple interest. You borrow $1,000 for 3 years at a rate of 10 percent per year. Here’s how to find out the amount you owe at the end of three years: continued Introduction to Business

  18. Business Building Blocks How to Compute Interest Step 1. Convert the interest rate percent to its decimal equivalent. (10% = 10/100 = .10) Interest Rates are always stated per year continued Introduction to Business

  19. Business Building Blocks How to Compute Interest Step 2. Use this formula: interest = principal x interest rate x time OR I=PRT Introduction to Business

  20. Business Building Blocks How to Compute Interest Decimal Interest Rate x = Principal x Time Interest x x $1,000 = $300 3 .10 continued Introduction to Business

  21. Business Building Blocks How to Compute Interest At the end of 3 years, the cost of the loan would be $300. Since you also must pay back the principal, you owe the lender $1,300. Introduction to Business

  22. Transferring Money transfer 13. Banks make it easy to ________ money from one person or business to another. 14. Today more banks are using _______________________ (EFT) to move money around. 15. With EFT, money is transferred from one account to another ________________________________. electronic funds transfers through a network of computers. Introduction to Business

  23. Lending Money 16. The money you deposit in a bank makes it possible for the ________________________________. 17. Most bank loans require some form of ______________. • Collateral ______________________ ______________________. bank to lend money to other customers collateral something valuable you put up for a loan Introduction to Business

  24. Lending Money 19. The four main types of loans that banks offer are: • A mortgage loan • A commercial loan • An individual loan • A line of credit Introduction to Business

  25. Mortgage 20. A mortgage ___________________ ______________________________ ______________________________ is a deed to give the property to the lender if the loan is not paid back. Introduction to Business

  26. Making an Ethical Decision • What are the most important financial issues that people should consider when buying a home? • What are the advantages of living in neighborhoods that are economically mixed? Introduction to Business

  27. Other Financial Services 21. Many banks provide _____________ on managing and investing your money. 22. You can also store valuable items, such as jewelry and certificates, in _________________________. financial advice safety-deposit boxes Introduction to Business

  28. Other Financial Services credit cards 23. Many banks offer ______________. 24. Banks also _________________, such as an inheritance. manage trust funds Introduction to Business

  29. Figure 12.2 HOW BANKS DO BUSINESS Banks are businesses that provide financial services to make a profit. What would happen to a bank’s profits if deposits suddenly decreased? Introduction to Business

  30. Fast Review • What are the three main functions of a bank? • How does an EFT work? Introduction to Business

  31. Fast Review • What are the types of loans a bank offers? Introduction to Business

  32. Commercial Banks Commercial banks 25. __________________ offer a full range of services such as checking and savings accounts, loans, and financial advice.They are often called _________________. full-service banks Introduction to Business

  33. Commercial Banks 26. To make a ____________, commercial banks usually_______________________ _________________ than the interest they pay on savings accounts. profit charge much more interest on the money they lend Introduction to Business

  34. Savings and Loan Associations 27. Savings and loan associations were originally set up to ________________________________. 28. The purpose of the savings and loan associations was to encourage people to _______________ and make it easier to buy a home or start a business. savings accounts and home mortgage loans save money Introduction to Business

  35. Savings and Loan Associations 29. Savings and loan associations ________________________________ __________________________________. 30. In the 1980s about _____________ of savings and loans failed. charge lower interest on loans and paid higher interest on savings 20 percent Introduction to Business

  36. Saving and Loan Associations passed new regulations 31. The government __________________ allowing savings and loan associations to charge higher interest rates and offer more services like credit cards. Introduction to Business

  37. Credit Unions 32. ____________ are nonprofit banks set up by organizations for their members to use. 33. Credit unions offer ____________________________, including credit cards, checking accounts, and loans. 34. Credit unions _____________________ and pay high interest rates on savings accounts. Credit Unions members a full range of services offer low-interest loans Introduction to Business

  38. Other Financial Institutions Mortgage companies 35. ___________________ provide loans specifically for buying a home or business. 36. __________________ offer short-term loans to businesses. Finance companies Introduction to Business

  39. Other Financial Institutions 37. ___________________ not only provide protection against things like fire and theft, but also offer loans to businesses. 38. ________________ that sell stocks and bonds may also offer a wide range of financial services to its customers. Insurance companies Brokerage firms Introduction to Business

  40. Fast Review • What are the types of banks? • How is a credit union different from a commercial bank? Introduction to Business

  41. Fast Review • Name some financial institutions other than banks that offer similar services. Introduction to Business

  42. The Federal Reserve System Federal Reserve System 39. The __________________ (or Fed) is the ________________________ in the United States. 40. Congress set up the Fed in 1913 _____________________________ that occurred during the 1800s and early 1900s. 41. The Fed consists of _____ Federal Reserve district banks, _______ branch banks, and about _____ member banks. central banking organization to end the periodic financial panics 12 25 5,000 Introduction to Business

  43. Functions of the Fed 42. The six functions of the Fed are: • Clearing checks • Acting as the federal government’s fiscal agent • Supervising member banks • Regulating the money supply • Setting reserve requirements • Supplying paper currency Introduction to Business

  44. Functions of the Fed Introduction to Business

  45. Fast Review • What is the Fed? • Name the six functions of the Fed. Introduction to Business

  46. How does the Fed create money? continued Introduction to Business

  47. With a 20 percent reserve requirement, if a bank lends out $1,000 how much money must it hold in reserve? continued Introduction to Business

  48. A bank must keep in its reserve 20 percent of a new deposit. How much money does the bank need to keep if it lends you $800? continued Introduction to Business

  49. How does the money supply at a bank expand? Introduction to Business

  50. Key Words monetary system money financial institution bank account deposit withdrawal interest continued Introduction to Business

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