Presentation on theme: "Money and Financial Institutions"— Presentation transcript:
1 Money and Financial Institutions Chapter 12Money and Financial Institutionspp
2 Learning Objectives After completing this chapter, you’ll be able to: Describe the functions and characteristics of money.Explain the services that banks offer.continued
3 Learning Objectives After completing this chapter, you’ll be able to: Name the types of banks.Identify the functions of the Federal Reserve System.
4 Why It’s ImportantUnderstanding the way money and financial institutions work is crucial to understanding the economy.
5 Key Words monetary system money financial institution bank account depositwithdrawalinterestcontinued
6 Key Words electronic funds transfer (EFT) collateral mortgage safety-deposit boxFederal Reserve System
7 The History of MoneyIn the monetary system goods and services are indirectly exchanged using money, which can then be exchanged for other goods and services.
8 The History of MoneyMoney can be anything that people accept as a standard for payment.
9 The History of MoneyIn other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.
10 WOULD THESE ITEMS BE ACCEPTABLE AS MONEY? Figure12.1WOULD 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.
11 Functions of Money The three basic functions of money are: It is a medium of exchangeIt is a standard of valueIt is a store of value
12 Characteristics of Money For money to carry out its functions, it must have several characteristics. Money must be:Stable in valueScarceAcceptedcontinued
13 Characteristics of Money Money must be:Divisible into partsPortable and durable
14 Functions and Characteristics of Money Graphic OrganizerGraphic OrganizerFunctions and Characteristics of MoneyFUNCTIONSCHARACTERISTICSStableScarceAcceptedDivisiblePortableDurableMedium of exchangeStandard of valueStore of value
15 What is the monetary system? How is money a standard of value? Fast ReviewWhat is the monetary system?How is money a standard of value?continued
16 What are some of the characteristics money must have to be useful? Fast ReviewWhat are some of the characteristics money must have to be useful?
17 BankingThe banking system is the main type of financial institution, or organization for managing money, in our economy.
18 Storing MoneyA bank account is a record of how much money a customer has put into or taken out of a bank.
19 Storing Money The money put in a bank is called a deposit. The money taken out of a bank is called a withdrawal.
20 Storing MoneyChecking accounts are used for storing money in the short term so you can draw on it easily if you want to go shopping or pay a bill.
21 Storing MoneySavings accounts are used for storing money over a long period of time.
22 Storing MoneyInterest is a rate the bank pays you for keeping your money there.If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.
23 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
24 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
25 Business Building Blocks How to Compute Interest Step 1. Convert the interest rate percent to its decimal equivalent.(10% = 10/100 = .10)continued
26 Business Building Blocks How to Compute Interest Step 2. Use this formula:interest = principal x interest rate x timecontinued
27 Business Building Blocks How to Compute Interest Decimal InterestRatexPrincipalxTime=Interest$1,000xx=.103$300continued
28 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.
29 Transferring MoneyBanks make it easy to transfer money from one person or business to another.
30 Transferring MoneyToday more banks are using electronic funds transfer (EFT) to move money around.With EFT, money is transferred from one account to another through a network of computers.
31 Lending MoneyThe money you deposit in a bank makes it possible for the bank to lend money to other customers.
32 Lending Money Most bank loans require some form of collateral. Collateral is something valuable you put up for a loan.
33 Lending Money The four main types of loans that banks offer are: A mortgage loanA commercial loanAn individual loanA line of creditcontinued
34 Lending MoneyA mortgage is a deed to give the property to the lender if the loan is not paid back.
35 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?
36 Other Financial Services Many banks provide financial advice on managing and investing your money.You can also store valuable items, such as jewelry and certificates, in safety-deposit boxes.
37 Other Financial Services Many banks offer credit cards.Banks also manage trust funds, such as an inheritance.
38 Banks are businesses that provide financial services to make a profit. Figure12.2HOW BANKS DO BUSINESSBanks are businesses that provide financial services to make a profit.What would happen to a bank’s profits if deposits suddenly decreased?
39 What are the three main functions of a bank? Fast ReviewWhat are the three main functions of a bank?How does an EFT work?continued
40 What are the types of loans a bank offers? Fast ReviewWhat are the types of loans a bank offers?
41 Commercial BanksCommercial banks offer a full range of services such as checking and savings accounts, loans, and financial advice.They are often called full-service banks.
42 Commercial BanksTo make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.
43 Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans.
44 Savings and Loan Associations The purpose of the savings and loan associations was to encourage people to save money and make it easier to buy a home or start a business.
45 Savings and Loan Associations Savings and loan associations charged lower interest on loans and paid higher interest on savings.In the 1980s about 20 percent of savings and loans failed.
46 Savings and Loan Associations The government passed new regulations allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.
47 Credit UnionsCredit unions are nonprofit banks set up by organizations for their members to use.
48 Credit UnionsCredit unions offer members a full range of services, including credit cards, checking accounts, and loans.
49 Credit UnionsCredit unions offer low-interest loans and pay high interest rates on savings accounts.
50 Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business.Finance companies offer short-term loans to businesses.
51 Other Financial Institutions Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses.
52 Other Financial Institutions Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers.
53 What are the types of banks? Fast ReviewWhat are the types of banks?How is a credit union different from a commercial bank?continued
54 Fast ReviewName some financial institutions other than banks that offer similar services.
55 The Federal Reserve System The Federal Reserve System (or Fed) is the central banking organization in the United States.
56 The Federal Reserve System Congress set up the Fed in 1913 to end the periodic financial panics that occurred during the 1800s and early 1900s.
57 The Federal Reserve System The Fed consists of 12 Federal Reserve district banks, 25 branch banks, and about 5,000 member banks.
58 Functions of the Fed The six functions of the Fed are: Clearing checks Acting as the federal government’s fiscal agentSupervising member bankscontinued
59 Functions of the Fed Regulating the money supply Setting reserve requirementsSupplying paper currency
60 Name the six functions of the Fed. Fast ReviewWhat is the Fed?Name the six functions of the Fed.