Chapter 19 Managing Money

1. Chapter 19Managing Money Section 1: Money and Credit Section 2: Banks and Banking Section 3: Saving and Investing Section 4: Insurance Against Hardship

2. Chapter 19 Section 1: Money and Credit OBJECTIVES • What are the four basic characteristics of currency? • Why do people and businesses accept checks as payment instead of cash? • How is credit important in families and in the economy as a whole?

3. Chapter 19 Section 1: Money and Credit Four basic characteristics of currency: • Must be easy to carry and take up little space • Based on system of units easy to multiply and divide • Must be durable • Must be in a standard form and guaranteed by the government

4. Chapter 19 Section 1: Money and Credit Why do people and businesses accept checks? • Much of the U.S. money supply is in the form of bank deposits. • A check is a promise of funds sufficient to cover stated amount. • Insufficient funds and overdrafts are punished with fines or criminal penalties.

5. Chapter 19 Section 1: Money and Credit The Importance of Credit • Credit allows wholesalers to buy a larger quantity of goods at once. • Families use credit for emergency purchases and large purchases. • Credit enables consumers to buy when production is high and goods are being sold. • Consumer spending encourages economic growth.

6. Chapter 19 Section 2: Banks and Banking OBJECTIVES • What is the FDIC, and how does it help depositors? • What caused the savings and loan crisis in the 1980s? • How and why does the Federal Reserve System regulate the amount of money in circulation?

7. Chapter 19 Section 2: Banks and Banking The FDIC: • FDIC—Federal Deposit Insurance Corporation • A government agency • Insures accounts in commercial and savings banks for up to $100,000

8. Chapter 19 Section 2: Banks and Banking The savings and loan crisis: • 1980s—many of the banks involved in risky loans, bad investments, and fraud • Hundreds of the banks failed • The FSLIC ran out of money, and debt was passed on to the FDIC. • The Resolution Trusts Corporation was established to sort out the crisis. • 1999—cost to taxpayers estimated at $165 billion

9. Chapter 19 Section 2: Banks and Banking The Federal Reserve System regulates the money in circulation: • Regulation prevents bank failure. • The Fed controls money circulation to keep the economy healthy. • The Fed buys government bonds from banks and individuals to increase circulation and speed economic growth. • The Fed sells government bonds to take money out of circulation when economy grows too fast. • Member banks can borrow money from the Fed to increase their reserves.

10. Chapter 19 Section 3: Saving and Investing OBJECTIVES • Why is it important to save money? • What are some ways people save and invest their money? • How does saving money help the U.S. economy?

11. Chapter 19 Section 3: Saving and Investing The importance of saving money: • People save for education, emergencies, retirement, and large purchases. • Credit purchases often require a down payment in cash. • Ability to make a large down payment reduces monthly payments and the total interest on a loan.

12. Chapter 19 Section 3: Saving and Investing Ways of saving and investing: • Purchasing items that may increase in value • Regular installments to a savings account that is earning interest • Certificates of deposit (CDs)—interest is paid when CD matures • Stocks—common and preferred stock; mutual funds; money market funds • Bonds—low risk; money and earned interest is returned when bond matures

13. Chapter 19 Section 3: Saving and Investing Saving money helps the U.S. economy: • Expansion of the economy requires capital; money in savings is used for expansion. • Money saved is also money invested in the economy. • Companies’ ability to raise capital promotes the country’s prosperity. • Banks use money in savings to make loans to businesspeople. • Businesses that save are able to reinvest in themselves.

14. Chapter 19 Section 4: Insurance Against Hardship OBJECTIVES • How are insurance companies able to cover the hardship costs of so many people? • What is the difference between private insurance and social insurance? • Why was Social Security created, and why are some people concerned about its future?

15. Chapter 19 Section 4: Insurance Against Hardship Insurance companies cover many people: • Premiums are collected from millions of policyholders. • Money is held in a reserve fund. • Laws specify how much must be held in the fund. • Claims are paid from the fund. • Relatively few policyholders make claims each year. • Other moneys are invested and profits are used to run the company.

16. Chapter 19 Section 4: Insurance Against Hardship Private Insurance and Social Insurance • Private insurance—voluntary insurance paid by individuals and companies: life insurance, health insurance, property and liability insurance • Social insurance—government programs meant to protect individuals from future hardships: Social Security • Social Security includes old age, survivors, and disability insurance, unemployment compensation and workers’ compensation

17. Chapter 19 Section 4: Insurance Against Hardship Social Security and Its Future • Social Security Act of 1935—part of the New Deal; intended to protect citizens from future hardships • Retirement population is growing while birthrate is dropping. • Fewer workers will be supporting growing group of retirees. • Critics argue the tax will continue to rise and prefer to abolish the program.