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Chapter Intro 2

Section 1: What Is Money?

The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service. People are willing to accept money in exchange for goods, and financial institutions give people both a safe place to deposit their money or take out loans.

Chapter Intro 2

Section 2: The Federal Reserve System

Political and economic institutions evolve to help individuals and groups accomplish their goals. The central bank of the United States is the Federal Reserve System. It controls the money supply, serves as the government’s bank, and watches over the banking industry.

Chapter Intro 2

Section 3: How Banks Operate

Political and economic institutions evolve to help individuals and groups accomplish their goals. Banks offer important financial services to millions of people.

Chapter Preview-End

Section 1-Main Idea

Guide to Reading

Big Idea

The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service.

Section 1

Money

People are willing to accept money in exchange for goods.

Section 1

Money (cont.)

• Money serves different functions and comes in different forms.

• Functions:

– Medium of exchange

– Store of value

– Measure of value

Section 1

• Types:

– Historically—salt, hides, gems, tobacco

– Coins

– Currency

Money (cont.)

• Confidence in money gives value

Features of U.S. Currency

Section 1

The Financial System

Financial institutions give people a safe place to deposit their money or take out loans.

Section 1

The Financial System (cont.)

• Types of financial institutions:

– Commercial banks

– Savings and loan associations (S & L)

– Credit unions

– All perform similar functions

Section 1

• Regulation and insurance make the U.S. financial system one of the safest.

The Financial System (cont.)

Section 1

• Federal Deposit Insurance Corporation (FDIC)

– Formed because of Great Depression

– Protects individual accounts up to $100,000

The Financial System (cont.)

• Consumer confidence in banks fuels economic growth

Section 1-End

Section 2-Main Idea

Guide to Reading

Big Idea

Political and economic institutions evolve to help individuals and groups accomplish their goals.

Section 2

Structure and Organization

The central bank of the United States is the Federal Reserve System.

Section 2

Structure and Organization (cont.)

• The Federal Reserve System, or Fed, is the central bank of the U.S.

– Established in 1913

– Divided into 12 Federal Reserve Districts

The Federal Reserve System

Section 2

• Thousands of member banks in the Fed

– Member banks are owners

– Buy stock and earn dividends in the Fed

Structure and Organization (cont.)

The Federal Reserve System

Section 2

• Economic decisions made by Board of Governors

– President appoints, Senate ratifies seven members

– One member chairs for four years

– Free of political pressure

Structure and Organization (cont.)

The Federal Reserve System

Section 2

• Different advisory councils report on:

– Condition of economy by district

– Financial institutions

– Consumer loans

Structure and Organization (cont.)

The Federal Reserve System

Section 2

• Federal Open Market Committee (FOMC) manipulates money supply

Structure and Organization (cont.)

The Federal Reserve System

Section 2

Functions of the Fed

The Fed controls the money supply, serves as the government’s bank, and watches over the banking industry.

Section 2

Functions of the Fed (cont.)

• The Fed:

– Regulates banks

– Controls the money supply

– Holds the government’s money

Section 2

• Two main regulatory functions:

– Banking regulation

– Consumer credit

Functions of the Fed (cont.)

Section 2

• Government’s bank

– Holds government’s money

– Sells bonds and Treasury bills

– Issues currency

Functions of the Fed (cont.)

Section 2

• Sets monetary policy by controlling money supply and interest

– Raises interest rate by contracting money supply

– Lowers interest rate by expanding money supply

Functions of the Fed (cont.)

Monetary Policy and Interest Rates

Section 2

• Fed tools:

– Discount rate—lower rate stimulates economy

– Raise and lower reserve requirements for member banks

– Open market operations—buying bonds stimulates economy

Functions of the Fed (cont.)

Monetary Policy and Interest Rates

Section 2

• The Fed is effective because it can move quickly and fine-tune as needed.

– Buying and selling bonds

– Changes in interest rates

Functions of the Fed (cont.)

Monetary Policy and Interest Rates

Section 2-End

Section 3-Main Idea

Guide to Reading

Big Idea

Political and economic institutions evolve to help individuals and groups accomplish their goals.

Section 3

Banking Services

Banks offer important financial services for millions of people.

Section 3

Banking Services (cont.)

• Investors start banks

– Need depositors for banks to grow

– Interest from loans generates profits

Section 3

• Deposits

– Checking accounts—no interest or low interest

– Savings accounts—higher interest for higher deposits

– Certificates of deposit—set time period, higher interest

– Banks make loans using deposits

Banking Services (cont.)

Section 3

Changes in Banking

Throughout American history, banking has become safer and more efficient.

Section 3

Changes in Banking (cont.)

• U.S. banking has become safer and more efficient with time.

• The National Bank chartered in 1791

– Supplied federal government

– Many opposed it

– Went out of business when charter lapsed

Section 3

• Privately owned state banks issued currency until 1863.

– National Banking Act

– National currency

– Federally chartered private banks

Changes in Banking (cont.)

Section 3

• Panic of 1907

– Federal Reserve Act of 1913 passed

Changes in Banking (cont.)

Section 3

• Great Depression

– 1930s

– F. D. Roosevelt closed all banks

– Only financially sound could reopen

– Federal Deposit Insurance Corporation (FDIC) established

Changes in Banking (cont.)

Section 3

• The Savings and Loan Crisis

– Late 1980s and early 1990s

– High-risk loans

– Hundreds of S&Ls failed

– FDIC took over regulations of S&Ls

Changes in Banking (cont.)

Section 3

• The Gramm-Leach-Bliley Act

– Passed in 1999

– Banking institutions can offer more services

Changes in Banking (cont.)

A. A

B. B

Section 3

0%0%

Do you agree that there could be a financial disaster like the Panic of 1907 today?

A. Agree

B. Disagree

Section 3-End

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Figure 2B

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Vocab1

coin

metallic form of money such as pennies, nickels, and dimes

Vocab2

currency

both coins and paper money

Vocab3

commercial bank

a financial institution that offers full banking services to individuals and businesses

Vocab4

savings and loan association (S&L)

financial institutions that traditionally loaned money to people buying homes

Vocab5

credit union

nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services

Vocab6

obvious

easily found, seen, or understood

Vocab7

medium

a means of doing

Vocab8

central bank

an institution that lends money to other banks; also, the place where the government does its banking business

Vocab9

Federal Open Market Committee (FOMC)

the most powerful committee of the Fed, because it makes the decisions that affect the economy as a whole by manipulating the money supply

Vocab10

monetary policy

policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit

Vocab11

discount rate

interest rate the Fed charges on its loans

Vocab12

reserve

a certain percentage of deposits that banks have to set aside as cash in their own vaults or as deposits in their Federal Reserve district bank

Vocab13

open market operations

purchase or sale of U.S. government bonds and Treasury bills

Vocab14

manipulate

to handle with skill

Vocab15

contract

to become smaller

Vocab16

checking account

an account in which deposited money can be withdrawn at any time by writing a check

Vocab17

savings account

an account in which customers receive interest based on how much money they have deposited

Vocab18

certificate of deposit (CD)

timed deposit that states the amount of the deposit, maturity, and rate of interest being paid

Vocab19

initial

the very first

Vocab20

principal

the most important

Vocab21

behalf

in the interest of

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