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U NIT 4: M ONEY, B ANKING, AND F INANCE Ch. 10: Money and Banking Ch. 11: Financial Markets.

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Presentation on theme: "U NIT 4: M ONEY, B ANKING, AND F INANCE Ch. 10: Money and Banking Ch. 11: Financial Markets."— Presentation transcript:

1 U NIT 4: M ONEY, B ANKING, AND F INANCE Ch. 10: Money and Banking Ch. 11: Financial Markets

2 C HAPTER 10.1 Bell Work: Grab workbook sheets Complete: Unit 1 Warm-up (88 A-C) (105-6 A-E) Complete Ch. 10 Warm-up (89 A-C) How does money serve the needs of our society? Objectives 3 Uses of Money 6 Characteristics of Money Sources of moneys values Key Terms /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s1.swf /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s1.swf

3 C H. 10 I NTRODUCTION How does money serve the needs of our society? Provides means for comparing values of goods/services Serves as a store of value W/out wouldnt be able to get wants/needs

4 3 U SES OF M ONEY Money is anything that can serve as…… Medium of Exchange Unit of Account Store of Value

5 B ARTERING W/out money, we would acquire goods/services through barter Still used in many parts of world Only in more traditional economies Too difficult to est. value of bartered goods in a specialized economy Money makes exchange EASIER Provides means for comparing value of goods/services Usually Money can serve as good store of value except in times of inflation

6 C URRENCY Coins and paper money Past forms of currency Cattle, salt, precious stones, fur, dried fish Would not work well today b/c they lack at least one of six characteristics of Money 6 Characteristics of Money Durability Portability Divisibility Uniformity Limited Supply Acceptability

7 D URABILITY /P ORTABILITY Durability Money must be able to withstand physical wear/tear Portability Needs to be easily carried Paper/coins are small/light

8 D IVISIBILITY /U NIFORMITY Divisibility Must be easily divided into small denominations Uniformity Must be able to be counted/measured correctly

9 L IMITED S UPPLY /A CCEPTABILITY Limited Supply Would lose value if unlimited Fed. Reserve regulated supply of money in circulation Acceptability Must be accepted by everyone as exchange for goods/services

10 S OURCES OF V ALUE Commodity Money: Objects of value to society Representative Money: Rep. ownership of value Fiat Money: Govt. says it is acceptable Identify this source

11 L ESSON C LOSING Frontline Video: The Warning w/?utm_campaign=viewpage&utm_medium=grid&ut m_source=grid w/?utm_campaign=viewpage&utm_medium=grid&ut m_source=grid Complete Workbook Pgs. 90,15 HW/Bell Work for tomorrow Complete S.1 Quiz

12 10.2 B ELL W ORK Books/Folders Complete S.1 Quiz

13 10.2 How has the American banking system changed to meet new challenges? Objectives Shifts bt. Centralized/decentralized banking before Civil War How govt. reforms stabilized banking system in 1800s Developments in early 1900s banking Causes of 2 recent banking crises Key Terms /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s2.swf /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s2.swf

14 I NTRODUCTION How has the American banking system changed to meet new challenges? Early people distrusted banks Banks have worked a lot to increase American Trust American Banking has developed to meet needs of growing and changing population

15 B ANKING BEFORE C IVIL W AR Early banks were informal businesses that merchants managed in addition to their regular trade Post Revolution, nations leaders had idea Est. a safe, stable banking system Led to tireless disagreement on how to organize natl banking system 2 Views Federalists: Wanted centralized banking system National bank Anti-federalists: Opposed plan Decentralized banking; owned/regulated by each state

16 1 ST B ANK OF US Federalists won the 1 st debate in 1791 Est. Bank of U.S. w/20 year charter for operations Anti-federalists argued bank unconstitutional and was set up only for wealthy Bank functioned well until 1811 when charter ran out State banks then took over Led to chaos/confusion Banks issued notes w/out specie to back it up Banks issued different currencies

17 2 ND B ANK OF U.S. To eliminate chaos, 2 nd bank chartered in 1816 Stability greatly restored Many still feared Banks powers 1832, Congress tried to renew charter Andrew Jackson vetoed renewal Led to Free Banking Era

18 F REE B ANKING E RA State chartered banks expanded from Large number led to many problems Bank runs/panics Often not enough gold/silver to back notes issued Led to bank runs: people trying to collect all at same time Wildcat banks (poorly financed/high rate of failure) Located in remote places where only wildcats lived Fraud New banks would issue notes for gold/silver then run off Different currencies Differing currencies from states/cities led to confusion and more fraudulent imitations

19 S TABILITY OF L ATER 1800 S Banking Acts of 1863 and 1864 Gave federal govt. power to: Charter Banks Require banks to hold adequate amount of gold/silver reserves Issue a national currency 1870s Nation adopted gold standard Set a definite value for the dollar 1 oz. gold =$20 Gave public a stable currency and gained public confidence

20 B ANKING OF E ARLY 1900 S Problems persisted despite stabilizing efforts Led to Federal Reserve Act of 1913 Est. Federal Reserve System; reorganizing bank system 12 regional Reserve Banks All natl charted banks required to be members Federal reserve board People to supervise banks; appt. by president Short-Term Loans Each regional reserve allowed member banks to borrow to meet short term demands; helped prevent failures in face of panics Federal Reserve notes Created currency used today, allowed them to increase/decrease supply as needed

21 B ANKING AND G REAT D EPRESSION Fed. Was unable to prevent Great Depression FDR acted to restore system in 1930s Est. FDIC to insure customer deposits if bank failed Changed currency to Fiat money so Fed could better control the supply

22 T WO C RISES FOR B ANKING 1970s-1980s Many industries Deregulated Led to crises for S/L; wasnt prepared for competitions High interest rates and risky loans added on 1989 congress passed legislation to abolish independence of S/L industry Mortgage companies and banks lent $ to people who couldnt afford to pay them off Interest rates increased and led to foreclosures Ripple effect hit banks and creditors hard and led to recession Led to 2008 Bailout of banks, auto-makers, and financial firms Savings/Loan Sub-Prime Mortgage

23 L ESSON C LOSING Workbook pages 91 and 23 S2 Quiz for tomorrow Finish Warning Video

24 10.3 B ELL W ORK Watch 2 Online Sources Visual Glossary Action Graph Finish Sect. 2 Quiz

25 10.3 What banking services to financial institutions provide? Objectives How money supply in U.S. is measured Functions of Financial institutions Different types of Financial Institutions Changes brought by electronic banking Key Terms /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s3.swf /Flash/Ch10/Econ_OnlineLectureNotes_ch10_s3.swf

26 I NTRODUCTION What banking services do financial institutions provide? Financial Institutions Provide electronic services Issue credit cards Make loans to businesses Provide mortgages to prospective home buyers Manage ATM machines

27 M EASURING M ONEY S UPPLY To keep track of different types economists divide money into categories M1 represents money that people can gain access to easily. Have liquidity (converted to cash easily) Currency held by public Deposits in checking accounts Travelers checks M2: all assets in M1 plus several additional assets. Cannot be converted to cash as easily Called Near Money ; Savings, mutual funds, CDs

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29 F UNCTIONS OF F INANCIAL I NSTITUTIONS Provide wide range of services Storing money Provide safe place to store money Saving Money Offer people ways to save money though: Savings accounts Checking accounts Money market accounts, allow people to save and write limited amount of checks CDs, offer guaranteed rate of interest but cannot be removed for period of time

30 F UNCTIONS OF F INANCIAL I NSTITUTIONS Loans Lend money to people and charge interest on loans Loans help consumers: Buy homes, pay for college, start/grow businesses Many banks loan money to other financial institutions/individuals Called Fractional Reserve Banking Mortgages/Credit Cards Specific type of loan to buy real estate Banks also issue credit cards Owners can buy goods/services w/promise to repay Often have high interest rate

31 S IMPLE AND C OMPOUND I NTEREST Interest is price paid for use of borrowed money Principal is amount borrowed Simple Interest Amount of interest paid only on the principal Compound interest Amount paid on both principal and gained interest Interest is how banks make money! They take in more than they pay out

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33 T YPES OF F INANCIAL I NSTITUTIONS Offer checking accounts, accepts deposits, and makes loans Commercial Banks Allows people to save/borrow enough for own homes Savings/Loan Assoc. Owned by depositors who make smaller deposits than commercial bank would take Savings Banks Cooperative lending assoc.s est. for particular groups Credit Unions Make installment loans to consumers Finance Companies

34 E LECTRONIC B ANKING ATMs allow customers to deposit/withdraw cash, and obtain information ATMS Debit cards can be used at an ATM or in a store to purchase goods. Require PIN for security Debit Cards More people using internet to check balances, transfer money, automatically deposit checks, and pay bills Home Banking Automated clearing houses allow consumers to pay bills w/out writing checks ACHs Carry money on them to be used in that store up on a phone (w/minutes) Store-value Cards Has Increased with the increasing importance of computers

35 L ESSON C LOSING Finish Online Videos How the Economy Works Case Study Finish Any of Open workbook Test Friday Review/Work Day tomorrow


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