McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Twenty One Understanding Money and Financial Institutions

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Characteristics of a Good Money System  Divisible  Portable  Durable  Hard to Counterfeit  Stable in Value

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Life Span of Currency Source: Bureau of Engraving and Printing

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Amount of $ in Circulation per Person Source: New Designs for Your Money, U.S. Dept. of Treasury

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved The Money Supply Currency Demand Deposits = Total M1 + Time Deposits & Money Market Accts. Total M2 *SA *SA = Seasonally Adjusted + =

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Federal Reserve System  History -Land Banks -Central Bank -Great Depression  Structure

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Federal Reserve Structure

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Regional Reserve Banks Boston New York Philadelphia Richmond Atlanta Dallas Cleveland Chicago Minneapolis St. Louis Kansas City San Francisco

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Monetary Policy  Reserve Requirement -Tight -Loose

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Fed Regulates Money Supply Increase Money Supply Reduce Discount Rate Buy Gov’t Bonds Set Credit Controls Expand Reduce Money Supply Increase Discount Rate Sell Gov’t Bonds Set Credit Controls Slow Down

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved U.S. Prime Interest Rate On January 1st Source: Money-Rates.com

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved U.S. Prime Interest and Federal Discount Rates Source: Money-Rates.com

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved American Banking System  Depository -Commercial Banks -Savings and Loan Associations/Thrifts -Credit Unions  Non-depository -Pension Funds -Finance Companies

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Services Available at Most Commercial Banks (Figure 21.5)

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Regulation of Financial Institutions  Regulatory Relationships -Federal Reserve Board -FDIC -SAIF(FSLIC) -NCUA

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Electronic Banking Trends in the U.S.  Internet  Electronic Funds Transfers (EFTs)  Check Conversion  Debit Card  Smart Card

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved International Banking  Eurodollar & Currency Exchange  Letter of Credit  Banker’s Acceptance  World Bank  IMF