Money and Banking Chapter 24

Three Functions of Money Serves as a medium of exchange – it is the way we buy stuff Serves as a store of value – you hold you wealth in money until you are ready to use it Serves as a measure of value – helps give value to goods

Types of Money Coins – metallic forms of money Currency – coins and paper money **Money is anything that people are willing to exchange for goods. ***Money has value because we believe that it is worth something. If we didn’t believe it was valuable, we wouldn’t use it.

TYPES of Financial Institutions Financial Institutions – where people and businesses put their money TYPES of Financial Institutions Commercial Banks – offer banking services for individuals and businesses. They make profit because of fees and interest payments on loans. Savings and Loan Associates – usually loan people money who are buying homes. They also have savings accounts. Credit Unions – They are not for profit. Sponsored by a group. It’s benefits are only open to members of the group.

Safety of the U.S. Financial System The U.S. system of banking is safe because of regulation and insurance. Regulation – banks have lots of rules they have to follow to minimize unnecessary risks. Insurance – Federal Deposit Insurance Company (FDIC) – protects consumers when financial institutions fail. Insures peoples money up to $100,000.00. **When people make deposits, banks turn around and make other loans so economic growth can continue.

The Federal Reserve System “The Fed” is the central bank of the U.S. It is the bankers bank. The U.S. is divided into 12 districts. Each one of those districts have a Federal Bank. Other banks can choose to become members of The Fed. The Fed is run by a Board of Governors. 7 members are selected by the Senate and the head is appointed by the President for a 4 year term. **Neither Congress or the President control The Fed.

Federal Open Market Committee Major policy group within the Fed. They affect the economy by changing the money supply. They change the money supply by changing interest rates.

Functions of the Fed Banking regulations Consumer credit – sets up rules that apply to consumer loans. *The Fed acts as the governments bank. It holds the governments money, it sells U.S. government bonds and treasury bills which the government uses to borrow money from Americans, and it issues the nations currency and controls the money supply

Monetary Policy Monetary Policy – involves controlling the money supply and the cost of borrowing money. The Fed can change the amount of money in circulation or the level of interest rates depending on what the economy needs. The Fed can implement policy changes much more quickly than the President or Congress is able to do so.