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If you live in any major city, you probably know what it is like to stand in line at your local bank, waiting for a teller to become free. A lot of people have stopped going to their local bank.

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introduction

If you live in any major city, you probably know what it is like to stand in line at your local bank, waiting for a teller to become free. A lot of people have stopped going to their local bank.

They find it more convenient to deal with their bank via the Internet. This is called cyberbanking, and it is done on your computer.

Introduction
preview questions
Preview Questions
  • What is money?
  • What “backs” the U.S. dollar?
preview questions4
Preview Questions
  • What are the functions of the Federal Reserve System?
  • Who is involved in the process of transferring funds from savers to investors?
chapter outline
Chapter Outline
  • The Functions of Money
  • Monetary Standards, or What Backs Money
  • Defining the U.S. Money Supply
chapter outline6
Chapter Outline
  • The U.S. Banking Structure
  • The Federal Reserve System
did you know that
Did You Know That...
  • The typical dollar bill changes hands 50 times a year?
  • Cash, of course, is not the only thing we use as money.
money
Money
  • Money
    • Anything that people generally accept in exchange for goods and services
types of money

Iron Boar tusk Playing cards

Copper Red woodpecker scalps Leather

Brass Feathers Gold

Wine Glass Silver

Corn Polished beads (wampum) Knives

Salt Rum Pots

Horses Molasses Boats

Sheep Tobacco Pitch

Goats Agricultural implements Rice

Tortoise shells Round stones with centers removed Cows

Porpoise teeth Crystal salt bars Paper

Whale teeth Snail shells Cigarettes

Types of Money
the functions of money
The Functions of Money
  • The functions of money are:

1) Medium of exchange - Any asset that sellers will accept as payment

2) Unit of accounting - A measure by which prices are expressed

3) Store of value (purchasing power)- The ability to hold value over time

4) Standard of deferred payment - use as a means of settling debts maturing in the future

the functions of money11
The Functions of Money
  • Liquidity
    • The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs
    • Money is the most liquid asset.
quick quiz
Quick Quiz
  • The four functions of money are:

Medium of Exchange

Unit of Accounting

Store of Value

Standard of Deferred Payment

monetary standards or what backs money
Monetary Standards,or What Backs Money
  • Questions
    • What backs money?
    • Is it gold, silver, or the federal government?
  • Answer
    • Confidence
monetary standards or what backs money14
Monetary Standards,or What Backs Money
  • Fiduciary Monetary System
    • The currency is issued by the government and its value is based uniquely on the public’s faith that the currency represents command over goods and services.
monetary standards or what backs money15
Monetary Standards,or What Backs Money
  • Fiduciary Monetary System
    • Acceptability
      • Where have the $2 bills gone and Susan B. Anthony dollar coins
    • Predictability of value and confidence
defining the u s money supply
Defining the U.S. Money Supply
  • The Transaction Approach: M1

1) Currency -Minted coins and paper currency not deposited in financial institutions

2) Checkable (transaction) deposits -Checkable Deposits

      • Any deposits in a thrift institution or a commercial bank on which a check may be written
    • Thrift Institution
      • Financial institutions that receive most of their funds from the savings of the public

3) Traveler’s checks - Purchased from a bank and signed when making purchases

defining the u s money supply18
Defining the U.S. Money Supply
  • Are Credit Cards Money?
    • Defer rather than complete transactions
  • Are Debit Cards Money?
    • Instruction to bank to transfer funds
defining the u s money supply19
Defining the U.S. Money Supply
  • The Liquidity Approach: M2
    • M2 = M1 + savings deposits and small denomination time deposits + overnight repurchase agreements + overnight Eurodollars deposits + retail money market mutual funds + money market deposit accounts
  • Near Monies
    • Assets that are almost money
    • Highly liquid
defining the u s money supply20
Defining the U.S. Money Supply
  • M2
    • Savings Deposits
      • Interest-earning funds that can be withdrawn at any time without payment of a penalty
defining the u s money supply21
Defining the U.S. Money Supply
  • M2
    • Time Deposit
      • A deposit in a financial institution that requires notice of intent to withdraw or must be left for an agreed period.
      • Early withdrawal may result in a penalty
      • Certificates of Deposit
defining the u s money supply22
Defining the U.S. Money Supply
  • M2
    • Money Market Deposit Accounts (MMDAs)
      • Accounts issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions
defining the u s money supply23
Defining the U.S. Money Supply
  • M2
    • Repurchase Agreement (REPO, RPs)
      • An agreement made by a bank to sell Treasury or federal agency securities to its customers, coupled with an agreement to repurchase them at a price than includes accumulated interest
defining the u s money supply24
Defining the U.S. Money Supply
  • M2
    • Eurodollar Deposits
      • Deposits denominated in U.S. dollars but held in banks outside the United States
defining the u s money supply25
Defining the U.S. Money Supply
  • M2
    • Money Market Mutual Funds
      • Funds of investment companies that obtain funds from the public that are held in common and used to acquire short-maturing credit instruments
the u s banking structure
The U.S. Banking Structure
  • Central Bank
    • A banker’s bank
    • An official institution that also serves as the bank to a country’s treasury
    • Normally regulates commercial banks
the u s banking structure29
The U.S. Banking Structure
  • The Fed
    • The Federal Reserve System
    • The central bank of the United States
the u s banking structure30
The U.S. Banking Structure
  • Financial Intermediaries: Sources and Uses of Funds
    • Institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers
the u s banking structure31
The U.S. Banking Structure
  • Financial Intermediation
    • The process by which financial institutions accept savings from businesses, households, and government and lend the savings to other businesses, households, and governments
the u s banking structure33
The U.S. Banking Structure
  • Liabilities
    • Amounts owed
    • The legal claims against a business or household by nonowners
the u s banking structure34
The U.S. Banking Structure
  • Assets
    • Amounts owned
    • All items to which a business or household holds legal claim
financial intermediaries and their assets and liabilities
Financial Intermediariesand Their Assets and Liabilities

Financial Intermediary Assets Liabilities

Commercial banks Car loans and other consumer Transactions accounts debt, business loans, savings deposits, various government securities, other time deposits, money home mortgages market deposit accounts

Savings and loan Home mortgages, some Savings and loan shares, associations consumer and business transactions accounts,vari- debt ous time deposits, money market deposit accounts

Mutual savings banks Home mortgages, some Transactions accounts, consumer and business savings accounts, various debt time deposits, money market deposit accounts

financial intermediaries and their assets and liabilities36
Financial Intermediariesand Their Assets and Liabilities

Financial Intermediary Assets Liabilities

Credit unions Consumer debt, long-term Credit union shares, mortgage loans transactions accounts

Insurance companies Mortgages, stocks, bonds, Insurance contracts, real estate annuities, pension plans

Pension and retirement Stocks, bonds, mortgages, Pension plans funds time deposits

Money market mutual Short-term credit instruments Fund shares with limited funds such as large-bank CDs, checking privileges Treasury bills, and high- grade commercial paper

the federal reserve system
The Federal Reserve System
  • Organization of the Fed
    • Board of Governors
    • 12 Federal Reserve District Banks
    • Federal Open Market Committee (FOMC)
    • Depository institutions
internet activity
Internet Activity
  • Click the “Board” button shown below to access the Board of Governors Web site.
  • For information on the Fed’s district banks click “Districts”.

Board

Districts

the federal reserve system40
The Federal Reserve System
  • Board of Governors (7)
    • Appointed by the President with Senate confirmation
    • 14 year staggered permanent terms
    • Chair chosen by the President to a four year permanent term
internet exercise
Internet Exercise
  • Visit the Miller Web site to learn more about the Fed.

Miller

the federal reserve system43
The Federal Reserve System
  • The Federal Open Market Committee (FOMC)
    • Determines monetary policy
    • Composed of:
      • The Board of Governors
      • The President of the NY Federal Reserve Bank
      • The President of 4 of the remaining district banks, chosen on a rotating basis
the federal reserve system44
The Federal Reserve System
  • Depository Institutions
    • 10,000 commercial banks
      • 4,000 member banks
    • 2,100 savings and loan associations
    • 12,000 credit unions
    • 500 mutual savings banks
the federal reserve system45
The Federal Reserve System
  • Functions of the Fed

1) Supplies the economy with fiduciary currency

2) Provides a clearing mechanism for checks

the federal reserve system47
The Federal Reserve System
  • Functions of the Fed

3) Holds depository institutions reserves

4) Acts as the government’s fiscal agent

5) Supervises member banks

6) Acts as the “lender of last resort”

7) Regulates the money supply

interacting with the internet
Interacting Withthe Internet
  • Click the “Fed” button below to learn more about the functions of the Fed.

Fed