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Chapter 12 Money and Financial Institutions

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1 Chapter 12 Money and Financial Institutions
Business Principles Fall 2009

2 Something to Think About…
Think about how bartering, or trading goods and services, might work in your life.

3 Essential Questions What are some ways you currently use a bank?
How might your dealings with a bank expand or change in the future? Why do you think it is important to use a bank?

4 Objectives Describe the functions and characteristics of money.
Discuss three main functions of a bank. Compare and contrast three types of banks that are found in our economy. Explain the major functions of the Federal Reserve System in the U.S. Economy.

5 The Purpose of Money Money allows people and businesses to buy and sell goods around the world. Money is a standard of value and a means of exchange or payment. It can be anything people will accept as a payment. In the past people used shells, stones, corn, parrot feathers, gopher tails for money

6 The Purpose of Money Today we use coins, currency, checks, and debits cards. This is our monetary system. Goods and services are directly exchanged using money.

7 Functions of Money You want to go buy your favorite product, but you don’t have any money to buy it. What would you have to do in order to get that favorite product?

8 Functions of Money Money has three basic functions:
Medium of exchange: anything generally accepted as a measure of value and of wealth Standard of Value: a way to measure the weight, amount, size, or value of something Store of Value: it holds its value over time and can be stored or saved

9 Characteristics of Money
Must be stable in value Must be scarce Must be accepted Should be divisible into parts Has to be portable and durable Must be hard to counterfeit Stable: Has little if any change in value Scarce: If the supply of an item is overly plentiful, it loses its value and cannot serve as money or a store of value since it would have little worth. Accepted: People have to be willing to take money in exchange for goods and services Counterfeit: means to make a copy of something in order to defraud or deceive people.

10 The Functions of Banks Financial Institution is a firm that manages money. Banks are the main type of financial institution They offer a variety of financial services Help other businesses and consumers manager their money

11 Storing Money Storing money means to place or leave it for preservation or later use. Bank account is used to keep a record of the amount of money that has been deposited or withdrawn from a bank Deposit: Money put in a bank account Withdrawal: money taken out Keeping your money in a bank prevents you from losing it, spending it, or having it stolen

12 Bank Accounts Checking Account Saving Account Short term storage
Banks charge a fee Saving Account Long term storage It earns more interest Interest: a rate that the bank pays customers for keeping their money If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.

13 Transferring Money Banks use checks and electronic funds transfers to move money. Checks transfer money from one party to another EFT allows money to transfer from one bank to another through a network Direct Deposit Direct Deposit: electronic transfer of a payment directly from the payer’s bank account to that of the party being paid. Payroll is a good example

14 Lending Money The money you deposit in a bank make it possible for the bank to lend to other customers Customers must pay interest on the money they borrow from banks Most banks require some form of collateral Collateral: property or goods pledged by a borrower to use as security against a loan it it is not repaid

15 Types of Loans Mortgage Loan Commercial Loan Individual Loan
Used to buy real estate Commercial Loan Made to businesses Individual Loan Made to individuals Line of Credit Lend money to be used at any time Mortgage: agreement in which a borrower gives a lender the right to take the property if the loan is not repaid Commercial: Buy supplies and equipment Individual: Personal Items….cars, home repairs, vacations

16 Other Financial Services
Many banks provide advice on managing and investing money. You can also store valuable items, jewelry and birth certificates, in a safe-deposit box. Banks offer debit and credit cards They also have a trust department that manages money

17 Exit Ticket What is a major advantage of using money over bartering in buying goods and services? What are the characteristics that money must have? What are the four types of loans that a bank makes? Why do you think it is important to use a bank?

18 Financial Institutions
Banks operate on state, national, and international levels There are strict rules to start a bank The owner must apply for a charter from the government

19 Financial Institutions
The three main types of banks are: Commercial banks Savings and loan associations Credit unions

20 Commercial Banks These makeup the majority of banks in the United States. Offer wide range of banking services, checking, savings, loans, and financial advice Called full-service banks

21 Commercial Banks Serve individual and businesses
They charge more interest on money they lend than the money they pay on savings accounts to earn a PROFIT.

22 Savings and Loan Associations
Financial institutions that hold customers’ funds in interest-bearing accounts and invest mainly in mortgage loans Originally, their purpose was to encourage people to save money and make it easier to buy a home

23 Savings and Loan Associations
In the 1980s, about 20% of savings and loan associations failed New regulations were passed allowing them to charge higher interest rates and offer more services.

24 Credit Unions Not-for-profit banks set up by organizations for their customers to use. Credit unions offer credit cards, checking accounts, low-interest loans, and high interest savings accounts

25 Other Financial Institutions
Mortgage Companies Provide loans for buying a home or business Finance Companies Short-term loans to businesses and consumers Insurance Companies Provide protection against problems and also offer loans to businesses Brokerage Firms Sell stock and bonds and also offer a wide range of financial services.

26 The Federal Reserve System
Central Bank of the United States It is the banker’s bank They monitor the money supply There are 12 Federal Reserve Districts, 25 Branch Banks, and 5,000 member banks

27 The Federal Reserve System
It’s mission is to: Provide the United States with a safe, flexible, and stable monetary and financial system Run by a board of directors

28 The Federal Reserve System
It has six functions: Clearing Checks Acting as the Federal Government’s Fiscal Agent Supervising Member Banks Regulating the Money Supply Setting Reserve Requirements Supplying Paper Currency

29 Assignment Name the headquarters of the 12 Federal Reserve district banks across the United States Find an example of each in the United States: Commercial Bank, Savings and Loan Association, Credit Union, Mortgage Companies, Finance Companies, Insurance Companies, and Brokerage Firms

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