Money, Financial Institutions, and the Federal Reserve * Chapter Twenty * Money, Financial Institutions, and the Federal Reserve McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

* WHAT’S MONEY? What is Money? * LG1 Money -- Anything people generally accept as payment for goods and services. Barter -- The direct trading of goods or services for other goods or services. 20-2

STANDARDS for a USEFUL FORM of MONEY * STANDARDS for a USEFUL FORM of MONEY What is Money? * LG1 Portability Divisibility Stability Durability Uniqueness 20-3

* The MONEY SUPPLY What is the Money Supply? * LG2 Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.). M2 – M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.). M3 -- M2 + big deposits like institutional money market funds. 20-4

FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM * FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM Basics About the Federal Reserve * LG2 The Board of Governors The Federal Open Market Committee 12 Federal Reserve Banks 3 Advisory Councils The member banks of the system 20-5

MANAGING the MONEY SUPPLY * MANAGING the MONEY SUPPLY Basics About the Federal Reserve * LG2 The Fed uses three basic tools: Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank. Open-Market Operations -- The buying and selling of government bonds. Discount Rate -- The interest rate the Fed charges for loans to member banks. 20-6

* * The U.S. BANKING SYSTEM Commercial banks LG4 Commercial banks Savings and loan associations Credit unions Nonbanks 20-7

PROTECTING DEPOSITORS’ MONEY * PROTECTING DEPOSITORS’ MONEY Protecting Your Funds * LG5 The Federal Deposit Insurance Company (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $100,000 ($250,000 until December 2013). The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. The National Credit Union Administration (NCUA) -- Provides up to $100,000 coverage per individual depositor per institution. 20-8

MAKING TRANSACTIONS in OTHER COUNTRIES * MAKING TRANSACTIONS in OTHER COUNTRIES International Banking and Banking Services * LG7 Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time. Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros). 20-9

LEADING INSTITUTIONS in INTERNATIONAL BANKING * LEADING INSTITUTIONS in INTERNATIONAL BANKING International Banking and Banking Services * LG7 World Bank -- Lends most of its money to less- developed nations to improve their productivity and help raise standards of living and quality of life. International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF. 20-10