Chapter 10Section 3 – Banking Today

Objectives

1. Explain how the money supply in the United States is measured.

2. Describe the services that banks provide.

3. Identify different types of financial institutions.

4. Analyze the changes brought about by electronic banking.

RiddleI have 3 coins that total 25 cents

and one of the coins is not a nickel. What are the three coins?

Money Supply Categories

M1 M2

Liquidity◦ Money that can be easily

accessed and immediately used for goods and services

CurrencyFunds in checking

accountsTraveler’s checks

“Near money”Cannot be used as

cash directly but can be converted fairly easily

Savings Account Funds

Money Market Mutual Funds

Certificates of Deposit

M1 or M2?Checking accountDollar billPersonal checkA new carTraveler’s check1-carat diamondCertificate of DepositSavings bondIndividual Retirement Account

Banking ServicesStoring Money

◦Insured from robbery and bank failure

Saving Money ◦Savings and Checking◦Money Market Accounts

Min amt of checks, interest rate can vary

◦Certificates of Deposit Don’t touch for 1 or 2 yr, high

fixed int. rate

Services…Loans

◦Fractional reserve banking◦Lend money to people and charges

interest◦Default

Mortgages◦A loan for buying real estate◦Interest

ServicesCredit Cards

◦Mini loansSimple Interest

◦Money paid on the principalCompound Interest

◦Money paid on the principal and simple interest

The amount of interest paid out by banks is less than the interest charged on loans

For ExampleYou deposit $100 in a savings

account at 5% simple interest. You will make $5 in a year if paid annually.

If you leave that $105 in account your compound interest would be 5% on $105 = $5.25. Instead of just 5% on the. $100

Electronic BankingATMsDebit CardsHome Banking

◦Online bankingAutomatic Clearing Houses

◦Automatically pays billsStored Value Cards

◦Gift Cards, Phone Cards, Smart cards issued to college students