Chapter Money

Section Preview Three basic functions of money Three basic functions of money The characteristics of money The characteristics of money Why our money has value Why our money has value

Functions of Money Medium of exchange Medium of exchange Accepted in exchange for goods and services Accepted in exchange for goods and services

Functions of Money Standard of value Standard of value Prices are expressed in dollars and cents Prices are expressed in dollars and cents A universal means of comparing value A universal means of comparing value $ $ 5,000, $38.6M $1.89

Functions of Money Serves as a store of value Serves as a store of value Means of saving for future use Means of saving for future use

Definition Currency Currency Coins and bills used as money in an economy Coins and bills used as money in an economy

Characteristics of Money 1. Money is generally acceptable by everyone 2. Can be counted and measured accurately 3. Durable, not easily destroyed 4. Convenient, easy to carry and use 5. Inexpensive to make 6. Supply is easy to control

Why Our Money Has Value Ingredients? Let’s look at the penny and the nickel… Ingredients? Let’s look at the penny and the nickel… 97.5% zinc & 2.5% copper 97.5% zinc & 2.5% copper Cost.081 cent to make in 2000 Cost.081 cent to make in 2000 Cost 1.26 cents to make in 2007 Cost 1.26 cents to make in 2007 Produced 7.4 billion in 2007 Produced 7.4 billion in % copper & 25% nickel 75% copper & 25% nickel Cost 7.7 cents to make in 2007 Cost 7.7 cents to make in 2007 Produced 1.2 billion Produced 1.2 billion

Why Our Money Has Value Cost 3.81 cents to make $1 bill Cost 3.81 cents to make $1 bill Backed by gold deposits at Fort Knox, KY? Backed by gold deposits at Fort Knox, KY? NO, President Nixon took the U.S. off the gold standard NO, President Nixon took the U.S. off the gold standard Only million ounces - $60B – there today - on reserve only Only million ounces - $60B – there today - on reserve only

Why Our Money Has Value Because the government says so Because the government says so U.S. government stands behind our money U.S. government stands behind our money Backed by the “full faith and credit” of the U.S. gov’t. Backed by the “full faith and credit” of the U.S. gov’t. “This note is legal tender for all debts, public and private.”

Chapter 15-2 Our Banking System

PRHS NATIONAL BANK CERTIFICATE OF DEPOSIT 12 month maturity20% Interest Rate

Section Preview Role of banks in an economy Role of banks in an economy Compare the different types of money Compare the different types of money What services are offered by banks What services are offered by banks Benefits of a reserve banking system Benefits of a reserve banking system How banks make a profit How banks make a profit Other financial institutions and the services they provide Other financial institutions and the services they provide

#1 - Types of Money 1. Coins and Bills

Types of Money 2. Checks – like currency Easy to use Easy to use Inexpensive to make Inexpensive to make Easy to control the supply Easy to control the supply Generally accepted Generally accepted Durable record of transaction Durable record of transaction Checks require demand deposits #2 Checks require demand deposits #2 Money in a checking account in a bank Money in a checking account in a bank Money is withdrawn “on demand” (by writing a check) Money is withdrawn “on demand” (by writing a check) Demand deposits represent 50% of money supply Demand deposits represent 50% of money supply

Types of Money 3. Traveler’s Checks Issued by a bank Issued by a bank Worth face value only Worth face value only

Purposes of Banks 1. Help us save money by keeping large amounts of money safe 2. Help us manage money by providing a means of exchange for goods and services

# 3 Banking Services Checking Accounts Checking Accounts Easy method of transactions Easy method of transactions No need to carry large amounts of cash No need to carry large amounts of cash Checks are useless if stolen Checks are useless if stolen Provide a clear record of transactions Provide a clear record of transactions

Banking Services Savings Accounts Savings Accounts Safe place to save money Safe place to save money Earns interest Earns interest Provides banks option to lend money, a loan Provides banks option to lend money, a loan Amount of money borrowed for a certain period of time Amount of money borrowed for a certain period of time Borrower repays loan amount, plus interest Borrower repays loan amount, plus interest Loans help to expand the economy Loans help to expand the economy Allows more people to buy large cost goods and services Allows more people to buy large cost goods and services Creates jobs for the providers of the goods and services Creates jobs for the providers of the goods and services Loaning money is most important economic role of banks #4 Loaning money is most important economic role of banks #4

Fractional Reserve Banking Banks keep fraction of the demand deposits and savings account deposits in reserve Banks keep fraction of the demand deposits and savings account deposits in reserve Rest is available for loans and investments Rest is available for loans and investments Generates income for banks Generates income for banks Largest source of income comes from interest on loans Largest source of income comes from interest on loans

Other Financial Institutions Savings and Loan Associations Savings and Loan Associations Initially to provide savings accounts and building loans Initially to provide savings accounts and building loans Mutual Savings Banks Mutual Savings Banks Owned by depositors Owned by depositors Services are like banks Services are like banks Credit Unions Credit Unions Requires membership Requires membership Offer savings accounts and loans Offer savings accounts and loans “Share drafts” are checking accounts “Share drafts” are checking accounts

# 5 How do Banks Make $ I & F I & F

Chapter 15-3 The Federal Reserve System KN3kD4T3ltY&feature=related KN3kD4T3ltY&feature=related

Section Preview Why the Federal Reserve System was created Why the Federal Reserve System was created Organization of the Federal Reserve System Organization of the Federal Reserve System Functions of the Federal Reserve System Functions of the Federal Reserve System Importance of the money supply to our economy Importance of the money supply to our economy

Why the Federal Reserve System was created - #1 There was too much economic uncertainty in the late 19 th and early 20 th centuries. There was too much economic uncertainty in the late 19 th and early 20 th centuries. Businesses closed creating financial panic. Businesses closed creating financial panic. A few banks controlled all of the money. A few banks controlled all of the money. Consumers demanded Gov’t intervention Consumers demanded Gov’t intervention Which president made it happen in 1913? Which president made it happen in 1913?

Federal Reserve System Organization of the Fed - #2 Organization of the Fed - #2 12 Federal Reserve Districts, each has Federal Reserve Bank 12 Federal Reserve Districts, each has Federal Reserve Bank Supervises banks in own district Supervises banks in own district Oversees economic health of the district Oversees economic health of the district Run by Board of Governors, 7 members Run by Board of Governors, 7 members Each serves 14-year term, chosen by President Each serves 14-year term, chosen by President Janet Yellen Fed Chair

Federal Reserve System Federal Reserve System (“the Fed”) Federal Reserve System (“the Fed”) Independent agency of the fed. Gov’t. WHY? Independent agency of the fed. Gov’t. WHY? Regulates and serves the banks nationwide Regulates and serves the banks nationwide Acts as central bank of the U.S. Acts as central bank of the U.S. Helps banks, to help citizens get their money Helps banks, to help citizens get their money Monitors economic health of the country Monitors economic health of the country

Functions of the Fed - #3 Collects and clears checks - ACH Collects and clears checks - ACH See “story of a check” graphic on page 339 See “story of a check” graphic on page 339 Supplies currencies to banks Supplies currencies to banks Serves as federal government’s bank Serves as federal government’s bank Tax revenue goes to a Federal Reserve Bank Tax revenue goes to a Federal Reserve Bank Government payments are drawn on a Federal Reserve Bank Government payments are drawn on a Federal Reserve Bank Tracks all government bonds, bills and notes Tracks all government bonds, bills and notes

Functions of the Fed Regulates banks Regulates banks Sets minimum reserves banks must have on hand Sets minimum reserves banks must have on hand Evaluates bank operations to insure compliance with Fed regulations Evaluates bank operations to insure compliance with Fed regulations Enforces laws protecting bank customers (ex. revealing all fees associated with loans) Enforces laws protecting bank customers (ex. revealing all fees associated with loans) Loans money to banks Loans money to banks banks pay discount rate, not interest rate banks pay discount rate, not interest rate

How Money Supply is Controlled Manipulates the nation’s money supply ($ in circulation) Manipulates the nation’s money supply ($ in circulation) Keeps the economy running evenly – minimize damaging effects caused by inflation and slowdowns Keeps the economy running evenly – minimize damaging effects caused by inflation and slowdowns Influence amount of money banks can lend Influence amount of money banks can lend Influence the amount of money we choose to borrow Influence the amount of money we choose to borrow This is its MOST IMPORTANT ROLE! This is its MOST IMPORTANT ROLE!

How Money Supply is Controlled 1. Raises or lowers reserve requirement of banks If lowered, less $ in vault, more $ available to loan If lowered, less $ in vault, more $ available to loan so money supply so money supply If raised, more $ in vault, less $ available to loan If raised, more $ in vault, less $ available to loan so money supply so money supply 2. Raises or lowers the discount rate charged banks If lowered, banks pay less for loans, charge less interest to us If lowered, banks pay less for loans, charge less interest to us More customers borrow $, money supply More customers borrow $, money supply If raised, banks pay more for loans, charge more interest to us If raised, banks pay more for loans, charge more interest to us Fewer customers borrow $, money supply Fewer customers borrow $, money supply

How Money Supply is Controlled 3. Fed buys and sells government bonds, an IOU When government borrows $ it issues a certificate, a bond, to the lender When government borrows $ it issues a certificate, a bond, to the lender Certificates are bought and sold Certificates are bought and sold We buy government bonds for investments We buy government bonds for investments government pays us back with interest government pays us back with interest If Fed buys bonds from banks, banks have more $ to lend If Fed buys bonds from banks, banks have more $ to lend Money supply goes up Money supply goes up If Fed sells bonds to banks, banks use reserves to buy them, so have less $ to lend If Fed sells bonds to banks, banks use reserves to buy them, so have less $ to lend Money supply goes down Money supply goes down

Balancing the Money Supply Must balance spending with production of goods and services Must balance spending with production of goods and services If too much money in circulation, spending outpaces availability of goods and services so prices rise If too much money in circulation, spending outpaces availability of goods and services so prices rise Result: inflation – a general rise in prices of goods & services Result: inflation – a general rise in prices of goods & services Bad: reduces buying power of a dollar Bad: reduces buying power of a dollar If too little money in circulation, spending declines and too many goods and services are not being purchased If too little money in circulation, spending declines and too many goods and services are not being purchased Result: recession – a general slowdown in economic activity/production Result: recession – a general slowdown in economic activity/production Bad: Lower production, lower profits, higher unemployment Bad: Lower production, lower profits, higher unemployment

Balancing the Money Supply The Fed takes action when… The Fed takes action when… Inflation threatens, it reduces the money supply Inflation threatens, it reduces the money supply Recession threatens, it increases the money supply Recession threatens, it increases the money supply

The End

Open-Notes Quiz 1. List 3 functions of money & give an example of each. medium of exchange standard of value store of value 2. List 6 characteristics of money. 1. Money is generally acceptable by everyone 2. Can be counted and measured accurately 3. Durable, not easily destroyed 4. Convenient, easy to carry and use 5. Inexpensive to make 6. Supply is easy to control 3. What gives our money its value? Backing of the government Backing of the government

Chapter 15-1 Quiz 1.List 4 out of the 6 characteristics of money. 2. Why does our money have value? (Where does its value come from?) (Where does its value come from?)

Chapter 15-1 Quiz 1.Generally acceptable by everyone 2 Can be counted and measured accurately 3. Durable, not easily destroyed 4. Convenient, easy to carry and use 5. Inexpensive to make 6. Supply is easy to control Because the government says so. It’s backed by the full faith and credit of the federal government. Because the government says so. It’s backed by the full faith and credit of the federal government.

Chapter 15-2 Quiz 1. List 3 types of money. 2. List 2 purposes of banks. 3. Define a loan? (2 parts to the definition) 1. Currency, checks, traveler’s checks 2. Help us save money by keeping our money safe Help us manage money by providing a means of exchange for goods and services Help us manage money by providing a means of exchange for goods and services 3. A certain amount of money borrowed for a specific time period

Chapter 15 Review 1. loan 2. recession 3. demand deposit 4. interest on loans 5. inflation 6. recession 7. currency 8. value 9. exchange 10. government backing 11. bills, coins, checks, traveler’s checks

Chapter 15 Review 12. discount rate, reserve requirement 13. Alan Greenspan 14. $41 million 15. False 16. False 17. False 18. False 19. False 20. False

Chapter 15 Review 21. False 22. False 23. True 24. True 25. True 26. False 27. False 28. False 29. True 30. False