1. Money and Financial Institutions
Chapter 12 pp

2. Introduction to Business
Learning Objectives
After completing this chapter, you’ll be able to:
Describe the functions and characteristics of money.
Explain the services that banks offer.3.
Name the types of banks.
4. Identify the functions of the Federal Reserve System.
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3. Introduction to Business
Why it’s Important
Understanding the way money and financial institutions work is crucial to understanding the economy.
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4. Introduction to Business
The History of Money
monetary system
1. In the _____________ goods and services are indirectly exchanged using money, which can then be ________________________________.
exchanged for other goods and services
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5. Introduction to Business
The History of Money
anything
2. Money can be _____________ that people ___________________ for payment.
3. In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.
accept as a standard
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6. Introduction to Business
Figure
12.1
WOULD THESE ITEMS BE ACCEPTABLE AS MONEY?
Imagine what business would be like without money. If you worked in a fast-food restaurant, it might pay you in food. Bartering is exchanging one product for another. American Colonialists engaged in this way of doing business.
Explain why or why not these items could serve as money. Recreate this table and check the appropriate box(es) for each that applies.
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7. Introduction to Business
The Functions of Money
4. The three basic functions of money are:
It is a medium of exchange
It is a standard of value
It is a store of value
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8. Characteristics of Money
5. For money to carry out its functions, it must have several characteristics. Money must be:
Stable in value
Scarce
Accepted
Divisible into parts
Portable and durable
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9. Functions and Characteristics of Money
Graphic Organizer
Graphic Organizer
Functions and Characteristics of Money
FUNCTIONS
CHARACTERISTICS
Stable
Scarce
Accepted
Divisible
Portable
Durable
Medium of exchange
Standard of value
Store of value
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10. Introduction to Business
Fast Review
What is the monetary system?
How is money a standard of value?
Goods and services are exchanged indirectly using money, which can then be exchanged indirectly using money,, which can then be exchanged for other goods and services.
It is used as a fixed means of measuring and comparing the values of different goods and services.
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11. Introduction to Business
Fast Review
What are some of the characteristics money must have to be useful?
Acceptability, portability, durability, divisibility, stability, difficult to counterfeit
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12. Introduction to Business
Banking
banking system
6. The ________________ is the main type of financial institution, or organization for ________________, in our economy.
managing money
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13. Introduction to Business
Storing Money
bank account
A ______________ is a record of how much money a customer has ____________________________.
The money put in a bank is called a _____________.
The money taken out of a bank is called a ________________. .
put into or taken out of a bank
deposit
withdrawal
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14. Introduction to Business
Storing Money
Checking accounts
10. __________________ are used for storing money in the _____________ so you can draw on it easily if you want to go shopping or pay a bill
11. ______________ accounts are used for storing money over a _____________ of time.
short term .
Savings
long period
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15. Introduction to Business
Storing Money
Interest
12. _____________is a rate the _________________________________.
If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year
bank pays you for keeping your money there .
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16. Business Building Blocks Understanding Interest
Simple interest, compounded annually, is a percentage of the amount borrowed. The amount borrowed is called the principal. Compound interest may be compounded daily, monthly, or yearly.
continued
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17. Business Building Blocks How to Compute Interest
Simple interest. You borrow $1,000 for 3 years at a rate of 10 percent per year. Here’s how to find out the amount you owe at the end of three years:
continued
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18. Business Building Blocks How to Compute Interest
Step 1. Convert the interest rate percent to its decimal equivalent.
(10% = 10/100 = .10)
Interest Rates are always stated per year
continued
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19. Business Building Blocks How to Compute Interest
Step 2. Use this formula:
interest = principal x interest rate x time OR
I=PRT
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20. Business Building Blocks How to Compute Interest
Decimal Interest
Rate x
Principal x
Time =
Interest
$1,000 x x =
.10 3
$300
continued
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21. 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.
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22. Introduction to Business
Transferring Money
transfer
13. Banks make it easy to ________ money from one person or business to another.
14. Today more banks are using _______________________ (EFT) to move money around.
15. With EFT, money is transferred from one account to another ________________________________.
electronic funds transfers
through a network of computers.
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23. Introduction to Business
Lending Money
16. The money you deposit in a bank makes it possible for the ________________________________.
17. Most bank loans require some form of ______________.
Collateral ______________________
______________________.
bank to lend money to other customers
collateral
something valuable you put up for a loan
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24. Introduction to Business
Lending Money
19. The four main types of loans that banks offer are:
A mortgage loan
A commercial loan
An individual loan
A line of credit
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25. Introduction to Business
Mortgage
20. A mortgage ___________________
______________________________
is a deed to give the property to the lender if the loan is not paid back.
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26. Introduction to Business
Making an Ethical Decision
What are the most important financial issues that people should consider when buying a home?
What are the advantages of living in neighborhoods that are economically mixed?
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27. Other Financial Services
21. Many banks provide _____________ on managing and investing your money.
22. You can also store valuable items, such as jewelry and certificates, in _________________________.
financial advice
safety-deposit boxes
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28. Other Financial Services
credit cards
23. Many banks offer ______________.
24. Banks also _________________, such as an inheritance.
manage trust funds
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29. Introduction to Business
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?
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30. Introduction to Business
Fast Review
What are the three main functions of a bank?
How does an EFT work?
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31. Introduction to Business
Fast Review
What are the types of loans a bank offers?
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32. Introduction to Business
Commercial Banks
Commercial banks
25. __________________ offer a full range of services such as checking and savings accounts, loans, and financial advice. They are often called _________________.
full-service banks
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33. Introduction to Business
Commercial Banks
26. To make a ____________, commercial banks usually_______________________
_________________ than the interest they pay on savings accounts.
profit
charge much more interest on the money they lend
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34. Savings and Loan Associations
27. Savings and loan associations were originally set up to ________________________________.
28. The purpose of the savings and loan associations was to encourage people to _______________ and make it easier to buy a home or start a business.
savings accounts and home mortgage loans
save money
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35. Savings and Loan Associations
__________________________________.
30. In the 1980s about _____________ of savings and loans failed.
charge lower interest on loans and paid higher interest on savings
20 percent
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36. Saving and Loan Associations
passed new regulations
31. The government __________________ allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.
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37. Introduction to Business
Credit Unions
32. ____________ are nonprofit banks set up by organizations for their members to use.
33. Credit unions offer ____________________________, including credit cards, checking accounts, and loans.
34. Credit unions _____________________ and pay high interest rates on savings accounts.
Credit Unions
members a full range of services
offer low-interest loans
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38. Other Financial Institutions
Mortgage companies
35. ___________________ provide loans specifically for buying a home or business.
36. __________________ offer short-term loans to businesses.
Finance companies
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39. Other Financial Institutions
37. ___________________ not only provide protection against things like fire and theft, but also offer loans to businesses.
38. ________________ that sell stocks and bonds may also offer a wide range of financial services to its customers.
Insurance companies
Brokerage firms
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40. Introduction to Business
Fast Review
What are the types of banks?
How is a credit union different from a commercial bank?
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41. Introduction to Business
Fast Review
Name some financial institutions other than banks that offer similar services.
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42. The Federal Reserve System
39. The __________________ (or Fed) is the ________________________ in the United States.
40. Congress set up the Fed in 1913 _____________________________ that occurred during the 1800s and early 1900s.
41. The Fed consists of _____ Federal Reserve district banks, _______ branch banks, and about _____ member banks.
central banking organization
to end the periodic financial panics 12 25
5,000
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43. Introduction to Business
Functions of the Fed
42. The six functions of the Fed are:
Clearing checks
Acting as the federal government’s fiscal agent
Supervising member banks
Regulating the money supply
Setting reserve requirements
Supplying paper currency
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44. Introduction to Business
Functions of the Fed
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45. Introduction to Business
Fast Review
What is the Fed?
Name the six functions of the Fed.
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46. Introduction to Business
How does the Fed create money?
continued
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47. Introduction to Business
With a 20 percent reserve requirement, if a bank lends out $1,000 how much money must it hold in reserve?
continued
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48. Introduction to Business
A bank must keep in its reserve 20 percent of a new deposit. How much money does the bank need to keep if it lends you $800?
continued
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49. Introduction to Business
How does the money supply at a bank expand?
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50. Introduction to Business
Key Words
monetary system
money
financial institution
bank account
deposit
withdrawal
interest
continued
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51. Introduction to Business
Key Words
electronic funds transfer (EFT)
collateral
mortgage
safety-deposit box
Federal Reserve System
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52. Money and Financial Institutions
End of
Chapter 12
Money and Financial Institutions pp