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Chapter Menu Chapter Introduction Section 1:Section 1:What Is Money? Section 2:Section 2:The Federal Reserve System Section 3:Section 3:How Banks Operate Visual Summary

Chapter Intro 1 Our market economy is based on the idea of voluntary exchange—we exchange money for the goods and services we need. You live in a world where this exchange usually involves money. It is the primary medium of exchange for goods and services.

Chapter Intro 2 Section 1: What Is Money? The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service. People are willing to accept money in exchange for goods, and financial institutions give people both a safe place to deposit their money or take out loans.

Chapter Intro 2 Section 2: The Federal Reserve System Political and economic institutions evolve to help individuals and groups accomplish their goals. The central bank of the United States is the Federal Reserve System. It controls the money supply, serves as the government’s bank, and watches over the banking industry.

Chapter Intro 2 Section 3: How Banks Operate Political and economic institutions evolve to help individuals and groups accomplish their goals. Banks offer important financial services to millions of people.

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Section 1-Main Idea Guide to Reading Big Idea The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service.

Section 1-Key Terms Guide to Reading Content Vocabulary coin currency commercial bankcommercial bank savings and loan association (S&L)savings and loan association (S&L) credit union Academic Vocabulary obvious medium

Section 1-Polling Question Do you trust the stability of our financial system? A.Yes B.No A.A B.B

Section 1 Money People are willing to accept money in exchange for goods.

Section 1 Money (cont.) Money serves different functions and comes in different forms. Functions: –Medium of exchange –Store of value –Measure of value

Section 1 Types: –Historically—salt, hides, gems, tobacco –CoinsCoins –CurrencyCurrency Money (cont.) Confidence in money gives value Features of U.S. Currency

A.A B.B C.C D.D Section 1 Which do you think would make a good form of money? A.Gold chains B.Baseball cards C.Seashells D.Paperclips

Section 1 The Financial System Financial institutions give people a safe place to deposit their money or take out loans.

Section 1 The Financial System (cont.) Types of financial institutions: –Commercial banksCommercial banks –Savings and loan associations (S & L)Savings and loan associations (S & L) –Credit unionsCredit unions –All perform similar functions

Section 1 Regulation and insurance make the U.S. financial system one of the safest. The Financial System (cont.)

Section 1 Federal Deposit Insurance Corporation (FDIC) –Formed because of Great Depression –Protects individual accounts up to $100,000 The Financial System (cont.) Consumer confidence in banks fuels economic growth

A.A B.B Section 1 Do you agree that commercial banks do better at managing consumers’ money than do non-profit credit unions? A.Agree B.Disagree

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Section 2-Main Idea Guide to Reading Big Idea Political and economic institutions evolve to help individuals and groups accomplish their goals.

Section 2-Key Terms Guide to Reading Content Vocabulary central bank Federal Open Market Committee (FOMC)Federal Open Market Committee (FOMC) monetary policy discount rate reserve open market operationsopen market operations

Section 2-Key Terms Guide to Reading Academic Vocabulary manipulate contract

A.A B.B Section 2-Polling Question Should the United States consolidate independent banks into one national bank? A.Yes B.No

Section 2 Structure and Organization The central bank of the United States is the Federal Reserve System.

Section 2 Structure and Organization (cont.) The Federal Reserve System, or Fed, is the central bank of the U.S.central bank –Established in 1913 –Divided into 12 Federal Reserve Districts The Federal Reserve System

Section 2 Thousands of member banks in the Fed –Member banks are owners –Buy stock and earn dividends in the Fed Structure and Organization (cont.) The Federal Reserve System

Section 2 Economic decisions made by Board of Governors –President appoints, Senate ratifies seven members –One member chairs for four years –Free of political pressure Structure and Organization (cont.) The Federal Reserve System

Section 2 Different advisory councils report on: –Condition of economy by district –Financial institutions –Consumer loans Structure and Organization (cont.) The Federal Reserve System

Section 2 Federal Open Market Committee (FOMC) manipulates money supplyFederal Open Market Committee (FOMC) Structure and Organization (cont.) The Federal Reserve System

A.A B.B Section 2 Do you agree that the Fed is necessary to the U.S. economy? A.Agree B.Disagree

Section 2 Functions of the Fed The Fed controls the money supply, serves as the government’s bank, and watches over the banking industry.

Section 2 Functions of the Fed (cont.) The Fed: –Regulates banks –Controls the money supply –Holds the government’s money

Section 2 Two main regulatory functions: –Banking regulation –Consumer credit Functions of the Fed (cont.)

Section 2 Government’s bank –Holds government’s money –Sells bonds and Treasury bills –Issues currency Functions of the Fed (cont.)

Section 2 Sets monetary policy by controlling money supply and interestmonetary policy –Raises interest rate by contracting money supply –Lowers interest rate by expanding money supply Functions of the Fed (cont.) Monetary Policy and Interest Rates

Section 2 Fed tools: –Discount rate—lower rate stimulates economyDiscount rate –Raise and lower reserve requirements for member banksreserve –Open market operations—buying bonds stimulates economyOpen market operations Functions of the Fed (cont.) Monetary Policy and Interest Rates

Section 2 The Fed is effective because it can move quickly and fine-tune as needed. –Buying and selling bonds –Changes in interest rates Functions of the Fed (cont.) Monetary Policy and Interest Rates

A.A B.B C.C D.D Section 2 The Fed can best stimulate the economy by A.buying bonds. B.expanding the money supply. C.lowering the discount rate. D.All of the above

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Section 3-Main Idea Guide to Reading Big Idea Political and economic institutions evolve to help individuals and groups accomplish their goals.

Section 3-Key Terms Guide to Reading Content Vocabulary checking accountchecking account savings accountsavings account certificate of deposit (CD)certificate of deposit (CD) Academic Vocabulary initial principal behalf

Section 3-Polling Question Would starting a bank be a good investment for someone with a lot of money? A.Yes B.No A.A B.B

Section 3 Banking Services Banks offer important financial services for millions of people.

Section 3 Banking Services (cont.) Investors start banks –Need depositors for banks to grow –Interest from loans generates profits

Section 3 Deposits –Checking accounts—no interest or low interestChecking accounts –Savings accounts—higher interest for higher depositsSavings accounts –Certificates of deposit—set time period, higher interestCertificates of deposit –Banks make loans using deposits Banking Services (cont.)

A.A B.B C.C D.D Section 3 If you were saving money for college, which would be the best investment? A.Checking account B.Savings account C.Certificate of deposit D.Money under the mattress

Section 3 Changes in Banking Throughout American history, banking has become safer and more efficient.

Section 3 Changes in Banking (cont.) U.S. banking has become safer and more efficient with time. The National Bank chartered in 1791 –Supplied federal government –Many opposed it –Went out of business when charter lapsed

Section 3 Privately owned state banks issued currency until –National Banking Act –National currency –Federally chartered private banks Changes in Banking (cont.)

Section 3 Panic of 1907 –Federal Reserve Act of 1913 passed Changes in Banking (cont.)

Section 3 Great Depression –1930s –F. D. Roosevelt closed all banks –Only financially sound could reopen –Federal Deposit Insurance Corporation (FDIC) established Changes in Banking (cont.)

Section 3 The Savings and Loan Crisis –Late 1980s and early 1990s –High-risk loans –Hundreds of S&Ls failed –FDIC took over regulations of S&Ls Changes in Banking (cont.)

Section 3 The Gramm-Leach-Bliley Act –Passed in 1999 –Banking institutions can offer more services Changes in Banking (cont.)

A.A B.B Section 3 Do you agree that there could be a financial disaster like the Panic of 1907 today? A.Agree B.Disagree

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Vocab1 coin metallic form of money such as pennies, nickels, and dimes

Vocab2 currency both coins and paper money

Vocab3 commercial bank a financial institution that offers full banking services to individuals and businesses

Vocab4 savings and loan association (S&L) financial institutions that traditionally loaned money to people buying homes

Vocab5 credit union nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services

Vocab6 obvious easily found, seen, or understood

Vocab7 medium a means of doing

Vocab8 central bank an institution that lends money to other banks; also, the place where the government does its banking business

Vocab9 Federal Open Market Committee (FOMC) the most powerful committee of the Fed, because it makes the decisions that affect the economy as a whole by manipulating the money supply

Vocab10 monetary policy policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit

Vocab11 discount rate interest rate the Fed charges on its loans

Vocab12 reserve a certain percentage of deposits that banks have to set aside as cash in their own vaults or as deposits in their Federal Reserve district bank

Vocab13 open market operations purchase or sale of U.S. government bonds and Treasury bills

Vocab14 manipulate to handle with skill

Vocab15 contract to become smaller

Vocab16 checking account an account in which deposited money can be withdrawn at any time by writing a check

Vocab17 savings account an account in which customers receive interest based on how much money they have deposited

Vocab18 certificate of deposit (CD) timed deposit that states the amount of the deposit, maturity, and rate of interest being paid

Vocab19 initial the very first

Vocab20 principal the most important

Vocab21 behalf in the interest of

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