Ch 12

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Chapter 12 Money andFinancial Institutions

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Introduction to Business, Money and Financial Institutions Slide 2 of 60

Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

1.1. Describe Describe the functions and characteristics of money.

2.2. ExplainExplain the services that banks offer.

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

3.3. NameName the types of banks.

4.4. IdentifyIdentify the functions of the Federal Reserve System.

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Why It’s ImportantWhy It’s Important

Understanding the way money and financial institutions work is crucial to understanding the economy.

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Key WordsKey Words

monetary systemmoneyfinancial institutionbank accountdepositwithdrawalinterest continued

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Key WordsKey Words

electronic funds transfer (EFT)collateralmortgagesafety-deposit boxFederal Reserve System

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The History of Money The History of Money In the monetary system goods and services are indirectly exchanged using money, which can then be exchanged for other goods and services.

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The History of Money The History of Money Money can be anything that people accept as a standard for payment.

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The History of Money The History of Money In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.

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Figure12.1 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.

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Functions of Money Functions of Money The three basic functions of money are:

1. It is a medium of exchange2. It is a standard of value 3. It is a store of value

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Characteristics of Money Characteristics of Money For money to carry out its functions, it must have several characteristics. Money must be:

• Stable in value• Scarce• Accepted

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Characteristics of Money Characteristics of Money Money must be:

• Divisible into parts • Portable and durable

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Graphic OrganizerFunctions and Characteristics of MoneyFunctions and Characteristics of Money

Graphic OrganizerGraphic Organizer

FUNCTIONS

• Medium of exchange• Standard of value• Store of value

CHARACTERISTICS• Stable• Scarce• Accepted• Divisible• Portable• Durable

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Fast Review

1. What is the monetary system?

2. How is money a standard of value?

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Fast Review

3. What are some of the characteristics money must have to be useful?

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Banking Banking The banking system is the main type of financial institution, or organization for managing money, in our economy.

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Storing Money Storing Money A bank account is a record of how much money a customer has put into or taken out of a bank.

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Storing Money Storing Money The money put in a bank is called a deposit.

The money taken out of a bank is called a withdrawal.

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Storing Money Storing Money Checking accounts are used for storing money in the short term so you can draw on it easily if you want to go shopping or pay a bill.

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Storing Money Storing Money Savings accounts are used for storing money over a long period of time.

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Storing Money Storing Money Interest is a rate the bank pays you for keeping your money there.

If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.

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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.

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Understanding InterestBusiness Building BlocksBusiness Building Blocks

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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:

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How to Compute InterestBusiness Building BlocksBusiness Building Blocks

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Step 1. Convert the interest rate percent to its decimal equivalent.

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(10% = 10/100 = .10)

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Step 2. Use this formula:

interest = principal x interest rate x time

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Principal

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Decimal Interest

RateTime Interest=xx

$1,000 x .10 x 3 = $300

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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.

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Transferring MoneyTransferring MoneyBanks make it easy to transfer money from one person or business to another.

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Transferring MoneyTransferring MoneyToday more banks are using electronic funds transfer (EFT) to move money around.

With EFT, money is transferred from one account to another through a network of computers.

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Lending Money Lending Money The money you deposit in a bank makes it possible for the bank to lend money to other customers.

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Lending Money Lending Money Most bank loans require some form of collateral.

Collateral is something valuable you put up for a loan.

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Lending Money Lending Money The four main types of loans that banks offer are:

• A mortgage loan• A commercial loan• An individual loan• A line of credit

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Lending Money Lending Money A mortgage is a deed to give the property to the lender if the loan is not paid back.

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Other Financial ServicesOther Financial ServicesMany banks provide financial advice on managing and investing your money.

You can also store valuable items, such as jewelry and certificates, in safety-deposit boxes.

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Other Financial ServicesOther Financial Services

Many banks offer credit cards.

Banks also manage trust funds, such as an inheritance.

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Figure12.2 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?

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Fast Review

1. What are the three main functions of a bank?

2. How does an EFT work?

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Fast Review

3. What are the types of loans a bank offers?

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Commercial Banks Commercial Banks Commercial banks offer a full range of services such as checking and savings accounts, loans, and financial advice.

They are often called full-service banks.

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Commercial Banks Commercial Banks To make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.

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Savings and Loan Associations Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans.

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Savings and Loan Associations Savings and Loan Associations The purpose of the savings and loan associations was to encourage people to save money and make it easier to buy a home or start a business.

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Savings and Loan Associations Savings and Loan Associations Savings and loan associations charged lower interest on loans and paid higher interest on savings.

In the 1980s about 20 percent of savings and loans failed.

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Savings and Loan Associations Savings and Loan Associations The government passed new regulations allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.

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Credit Unions Credit Unions Credit unions are nonprofit banks set up by organizations for their members to use.

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Credit Unions Credit Unions Credit unions offer members a full range of services, including credit cards, checking accounts, and loans.

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Credit Unions Credit Unions Credit unions offer low-interest loans and pay high interest rates on savings accounts.

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Other Financial Institutions Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business.

Finance companies offer short-term loans to businesses.

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Other Financial Institutions Other Financial Institutions Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses.

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Other Financial Institutions Other Financial Institutions Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers.

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Fast Review

1. What are the types of banks?

2. How is a credit union different from a commercial bank?

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Fast Review

3. Name some financial institutions other than banks that offer similar services.

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The Federal Reserve SystemThe Federal Reserve SystemThe Federal Reserve System (or Fed) is the central banking organization in the United States.

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The Federal Reserve SystemThe Federal Reserve SystemCongress set up the Fed in 1913 to end the periodic financial panics that occurred during the 1800s and early 1900s.

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The Federal Reserve SystemThe Federal Reserve SystemThe Fed consists of 12 Federal Reserve district banks, 25 branch banks, and about 5,000 member banks.

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Functions of the FedFunctions of the FedThe six functions of the Fed are:

• Clearing checks • Acting as the federal government’s

fiscal agent • Supervising member banks

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Functions of the FedFunctions of the Fed

• Regulating the money supply • Setting reserve requirements • Supplying paper currency

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Fast Review

1. What is the Fed?

2. Name the six functions of the Fed.

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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?

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End ofChapter 12 Money andFinancial Institutions

Ch 12

Economy & Finance