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BUSINESS ESSENTIALS Fourth Edition PART 6 . . . . . . . . . . . . . . . . . . . . . . . . Understanding Financial Issues Ronald J. Ebert & Ricky W. Griffin Copyright ©2003 Prentice Hall, Inc. Chapter 14 Understanding Money and Banking

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slide1

BUSINESS

ESSENTIALS

Fourth Edition

PART 6 . . . . . . . . . . . . . . . . . . . . . . . .

Understanding Financial Issues

Ronald J. Ebert & Ricky W. Griffin

Copyright ©2003 Prentice Hall, Inc.

chapter 14

Chapter 14

Understanding Money and Banking

slide3
“A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins to rain.”~ Mark Twain
key topics
Key Topics
  • Money and its forms in the U.S.
  • U.S. financial institutions
  • How banks create money and how they are regulated
  • The Federal Reserve system
  • Changes in the financial industry
  • International banking and finance
what is money
What Is Money?
  • Portability
  • Divisibility
  • Durability
  • Stability
the functions of money
The Functions of Money

Medium of Exchange

Store of Value

Unit of Account

the cost of producing u s coins
The Cost of Producing U.S. Coins

Golden Dollar 10.03 cents

Half Dollar 9.93 cents

Quarter 4.29 cents

Dime 1.88 cents

Nickel 3.13 cents

Penny .81 cents

Source: http://www.usmint.gov/faqs/circulating_coins

just how much is a ton of money worth
Just How Much Is a Ton of Money Worth?

Dollar Bills $908,000

Quarters $40,000

Pennies $3,632

Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money

the money supply
The Money Supply
  • M1: Spendable
    • Currency
    • Demand deposits
  • M2: Spendable plus Convertible
    • Time deposits
    • Money market mutual funds
    • Savings deposit
money supply growth

5.4

5.0

4.4

4.0

3.4

3.0

Money Supply (trillions)

2.4

2.0

1.4

1.0

0.4

0

1964 1969 1974 1984 1984 1989 1994 2001

Money Supply Growth

M-2

M-1

credit cards a major financial force
Credit CardsA Major Financial Force
  • Credit cards accounted for almost half of all transactions for the year 2000
  • Credit cards are a large and growing business

Convenient for users

Highly profitable for issuers

u s financial institutions
U.S. Financial Institutions
  • Commercial Banks
    • Diversification and mergers
    • Commercial interest rates
  • Savings and Loan Associations
  • Mutual Savings Banks
u s financial institutions13
U.S. Financial Institutions
  • Credit Unions
  • Non-Deposit Institutions
    • Pension funds
    • Insurance companies
    • Finance companies
    • Securities investment dealers
special financial services
Special Financial Services
  • Individual Retirement Accounts (IRAS)
  • Trust Services
  • International Services
    • Currency exchange
    • Letters of credit
    • Banker’s acceptance
special financial services15
Special Financial Services
  • Financial advice and brokerage services
  • Automated teller machines
  • Electronic funds transfer
banks as creators of money

$100.00 $10.00 $90.00 $190.00

90.00 9.00 81.00 271.00

81.00 8.10 72.90 343.00

72.90 7.29 65.61 409.51

65.61 6.56 59.05 468.56

Money held in Reserve by Bank

Money to Lend

Total Supply

Deposit

Banks As Creators of Money
the federal reserve system
Structure

Board of governors

Reserve banks

Member banks

Functions

Banking for the government

Banking for banks

Controlling the money supply

The Federal Reserve System
controlling the money supply the tools of the fed
Controlling the Money SupplyThe Tools of the Fed
  • Reserve requirements
  • Discount rate controls
  • Open market operations
  • Selective credit controls
the changing money and banking system
The Changing Money and Banking System

Deregulation

Interstate Banking

electronic technologies a dramatic change
Electronic TechnologiesA Dramatic Change

Debit Cards

Smart Cards

E-cash

the international payments process
The International Payments Process

Olive Exchange

(Greece to U.S.)

Equipment Exchange

(U.S. to Greece.)

1

8

U.S. Importer

U.S. Bank

U.S. Exporter

2

6

7

3

4

5

Greek Exporter

Greek Bank

Greek Importer

bolstering international trade
Bolstering International Trade

International Monetary Fund (IMF)

  • Stable exchange rates
  • Temporary short-term loans
  • Cooperation on global monetary issues
  • International payments system
  • World Bank
    • Provides a limited scope of financial services
chapter review
Chapter Review
  • Define money and its forms in the U.S.
  • Describe U.S. financial institutions
  • Explain how banks create money and how they are regulated
  • Discuss the functions and tools of the Federal Reserve system
  • Identify how the financial industry is changing
  • Understand international banking and finance