Unit 5 Microeconomics: Money and Finance Chapters 10.3 Economics Mr. Biggs

Measuring the Money Supply Money supply - All the money available in the United States economy. Economists divide the money supply into several categories. The main categories are called M1 and M2. Banking Today

M1 M1 are assets that people can gain access to easily and immediately pay for goods and services. Liquidity - The ability of money to be used as, or directly converted to, cash. Demand deposits - The money in checking accounts. Traveler’s checks also makeup a small part M1 money. M2 M2 includes all M1 assets plus other assets that cannot be used directly as cash. They can be converted easily and are sometimes called “near money.” Some examples are savings deposits and money market funds. Money market funds - A fund that pools money from small savers to purchase short term government and corporate securities.

Functions of Financial Institutions Banks and other financial institutions are essential to managing the money supply. Storing Money Banks provide a safe, convenient place for people to store money. Saving Money The common types of accounts are: Savings, checking, money market, and certificates of deposit (CD). Money markets and CDs provide higher interest rate than saving or checking accounts. Interest rates for money markets can vary while a CD provides a guaranteed interest rate over a period of time.

Loans Fractional reserve banking - A banking system that keeps only a fraction of funds on hand and lends out the remainder. A bank makes profit by lending out the most money it can at the highest interest rate. The bank must also consider the security of its loans to avoid consumer default. Default - Failure to pay back a loan.

Mortgages Mortgage - A specific loan used to purchase real estate. Borrowers may secure a 15 to 30 year loan to purchase a house. A small difference in the interest rate can save or cost a borrower thousands of dollars over the life of the loan.

Credit Cards Credit card - A card entitling the holder to buy goods and services based on the holders promise to pay for the goods and services. Simple and Compound Interest Interest - The price paid for the use of borrowed money. Principal - The amount of money borrowed. Simple interest is paid only on the principal. Compound interest is paid on the principal and accumulated interest.

Banks and Profit The largest source of profit for banks is the interest they receive on loans. Types of Financial Institutions During the 1990s, commercial banks, savings and loan associations, mutual savings banks, and credit unions became more similar than dissimilar, but differences still remain. Commercial Banks Commercial banks traditionally served businesses. They now serve a wide variety of customers and provide the largest array of services.

Savings and Loan Associations Savings and Loans were for “thrifty” people who save up and borrow enough to buy their own home. Now they provide mostly the same services as commercial banks. Savings Banks Savings banks serve people who make smaller deposits and transactions than commercial banks wish to handle. Credit Unions Credit unions are cooperative lending associations for particular groups such as teachers or federal employees. They are small and specialize in home mortgages and car loans, usually at favorable rates.

Finance Companies Finance companies make installment loans to consumers. The high repayment failure rate causes finance charges to be higher than banks. Electronic Banking Computerized banking has revolutionized banking in much the same way that paper currency changed banking long ago. Automatic Teller Machines ATMs provide 24 hour access and are replacing many of the services traditionally done by bank tellers. Debit Cards Debit cards - A card used to withdraw money at ATMs and to make check purchases.

Home Banking Some banks are virtual and totally online. Many services at traditional banks can also be conducted online. Automatic Clearing Houses Funds can be transferred directly from accounts to pay a creditor. Creditor - A person or institution to whom money is owed. Stored Value Cards Smart cards have a magnetic strip with account information. It is usually used for a specific service such as a monthly bus pass or a specific amount of money to use for purchases.

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