Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 6........................ Understanding...

Fourth EditionFourth Edition

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc.

PART 6 . . . . . . . . . . . . . . . . . . . . . . . .PART 6 . . . . . . . . . . . . . . . . . . . . . . . .Understanding Financial IssuesUnderstanding Financial Issues

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 14 - 14 - 22

Chapter 14Chapter 14

Understanding Money and Banking

Understanding Money and Banking


“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

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


Portability

Divisibility

Durability

Stability

What Is Money?


The Functions of Money

Medium of Exchange

Store of Value

Unit of Account


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


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


The Money Supply

M1: SpendableCurrency

Demand deposits

M2: Spendable plus Convertible

Time deposits

Money market mutual funds

Savings deposit

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Money Supply Growth

M-1M-1

M-2M-2


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 Convenient for usersusers

Convenient for Convenient for usersusers

Highly profitable Highly profitable for issuersfor issuers

Highly profitable Highly profitable for issuersfor issuers


U.S. Financial Institutions

Commercial BanksCommercial Banks

Diversification and mergersDiversification and mergers

Commercial interest ratesCommercial interest rates

Savings and Loan AssociationsSavings and Loan Associations

Mutual Savings BanksMutual Savings Banks


U.S. Financial Institutions

Credit UnionsCredit Unions

Non-Deposit InstitutionsNon-Deposit Institutions

Pension fundsPension funds

Insurance companiesInsurance companies

Finance companiesFinance companies

Securities investment dealersSecurities investment dealers


Special Financial Services

Individual Retirement Accounts (IRAS)

Trust Services

International Services

Currency exchange

Letters of credit

Banker’s acceptance


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

DepositMoney held in

Reserve by BankMoney to Lend

Total Supply


The Federal Reserve System

StructureStructure

Board of governorsBoard of governors

Reserve banksReserve banks

Member banksMember banks

FunctionsFunctions

Banking for the Banking for the governmentgovernment

Banking for banksBanking for banks

Controlling the Controlling the money supplymoney supply


Reserve requirements

Discount rate controls

Open market operations

Selective credit controls

Controlling the Money SupplyThe Tools of the Fed


The Changing Money and Banking System

Interstate BankingDeregulationDeregulation


Electronic Technologies A Dramatic Change

Debit CardsDebit CardsDebit CardsDebit Cards

Smart CardsSmart CardsSmart CardsSmart Cards

E-cashE-cashE-cashE-cash


The International Payments ProcessOlive Exchange(Greece to U.S.)

Equipment Exchange(U.S. to Greece.)

U.S. Importer U.S. ExporterU.S. Bank

Greek Exporter Greek ImporterGreek Bank

1

23

4 5

6 7

8


Bolstering International Trade

International Monetary Fund (IMF)International Monetary Fund (IMF)Stable exchange rates

Temporary short-term loans

Cooperation on global monetary issues

International payments system

World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services

World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services


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

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