1. MONEY AND FINANCIAL INSTITUTIONS
Chapter 12

2. MONEY
If you didn’t have money, you would have to trade. This is called?
Barter – trade goods and services for other goods and services
Monetary System – goods and services are indirectly exchanged for money

3. MONEY Money – anything that people accept as a standard of payment
Must have three functions
Medium of exchange
Standard of value
Store of value

4. FUNCTIONS
Medium of Exchange – money is a medium to trade for goods and services
Prevents bartering
Sell tomatoes to get CDs – example
Money is NOT a good or a service
It is a means of exchanging goods and services

5. FUNCTIONS Standard of Value – a fixed measure of something
How many tomatoes makes up one CD?
How many gallons of milk for a Big Mac ®
With money, these are not issues
Money has same value to everyone
Can have set values (prices) for goods and services

6. FUNCTIONS Store of value – holds value over time and can be saved
Can increase money to make you wealthier
Stores very well, does not mold or fall apart

7. CHARACTERISTICS In most of the world, money is paper and coins.
All money has to have the same characteristics
Characteristics:
Scarce
Accepted
Divisible
Portable
Durable

8. STOP SLIDE

9. BANKING
Financial Institution – organization for managing money in our economy
Banks offer several services
Storing Money
Transferring Money
Lending Money
Other

10. STORING MONEY
Bank Account – record of how much money a customer has deposited or withdrawn
Deposit – money put into the bank
Withdrawal – money taken out of the bank
Keeping money in bank makes it safer and harder for you to spend.

11. ACCOUNTS
Checking Account – Demand Deposit because you can demand that money is paid
Store money in short term
Some banks charge fees for checking accts.
Savings Account
Store money for long term
Earn interest

12. INTEREST Interest is money you earn on your savings
Rate bank pays you for keeping your money
I = P * R * T
Interest = Principal * Rate * Time
Principal is your money
Rate is the % the bank pays (as a decimal)
Time is given in terms of years

13. INTEREST EXAMPLE
You have $1,000, and the bank pays 3% interest, compounded yearly. How much money would you have after two years?
I = P * R * T
I = 1,000 * .03 * 2
I = $60
Your money is P + I or 1, = $1,060

14. TRANSFERRING MONEY
Every business transaction involves transfer of money
Almost all transfers occur electronically
Electronic Funds Transfer – money is transferred through a network of computers
Used to give you money
Used to pay bills

15. LENDING MONEY
Banks lend out the money you deposit. Give this money to other people to buy things.
Bank pays you interest on the money you have in bank
Bank charges interest on the money it loans out to people
Difference in interest rates is profit for bank

16. TYPES OF LOANS
Mortgage Loan – loan used to buy real estate – the real estate is the collateral
Commercial Loan – loan to businesses
Individual Loan – made to people based on other collateral to allow for payment.
Line of Credit – Set aside money for use later (sometimes called a home equity loan)

17. Business Building Blocks How to Compute Interest
Step 2. Use this formula:
interest = principal x interest rate x time
continued

18. Business Building Blocks How to Compute Interest
Decimal Interest
Rate x
Principal x
Time =
Interest
$1,000 x x =
.10 3
$300
continued

19. Business Building Blocks How to Compute Interest
At the end of 3 years, the cost of the loan would be $300. Since you also must pay back the principal, you owe the lender $1,300.

20. Banks are businesses that provide financial services to make a profit.
Figure
12.2
HOW BANKS DO BUSINESS
Banks are businesses that provide financial services to make a profit.
What would happen to a bank’s profits if deposits suddenly decreased?

21. MORE BANK SERVICES
Safe-Deposit boxes – put valuables in and you have only access
Credit cards – Mastercard, Discover and Visa issued by banks.
Trust and estate – planning for your will
Retirement services – helping you invest for your future

22. TYPES OF BANKS Banks are state, national or international
Three main types of banks:
Commercial
Savings and Loans
Credit Unions

23. COMMERCIAL BANKS Sometimes called full service banks
Largest type of bank in US
Earn profit by charging higher interest on loans than they pay on savings accounts

24. SAVINGS AND LOANS
Charged lower interest and paid higher interest to encourage savings and help people be able to afford houses
In 1980’s about 20% of these failed
Government allowed them to charge higher interest rates
Now similar to commercial banks

25. CREDIT UNIONS
Non-Profit banks set up for members of an organization to use.
Lower risks, so can offer higher interest rates on savings, and lower rates on lending
Offer almost all services a bank does

26. OTHER FINANCIALS Mortgage Companies – loans just for houses
Finance Companies – Short term loans with higher interest rates
Insurance Companies – Provide insurance AND loan money
Brokerage Firms – Sell stocks and bonds

27. THE FED
The Federal Reserve System (FED) is the central banking organization in the US.
Consists of 12 Federal Reserve Banks
25 Branch Banks
5,000 member banks
Run by the Chairman of the Fed
Used to be Alan Greenspan
Now is Ben Bernanke

28. FED FUNCTIONS
Clearing Checks - Transferring funds from one account to another
Acting as the Federal Government’s Bank – Spends and distributes federal money on behalf of the US Treasury
Supervising Member Banks – regulates banks in the FED – necessary due to bank failures in the early 1900’s.

29. FUNCTIONS OF FED
Regulating the Money Supply – Determine the amount of money in circulation (Scarcity)
Setting Reserve Requirements – amount of money a bank must have on hand before it can loan money to others
Supplying Paper Currency – making the money that we use

30. RESERVE REQUIREMENTS Fed determines how much money a bank must keep.
Current Reserve Requirement is about 8%.
Bank only keeps 8% of deposits, and lends out rest to others.
This lending creates money.

31. Reserve Requirements and Money Creation Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$ =$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$ =$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.