Ch. 12. Money and Financial Institutions Objective: Analyze the functions and characteristics of money and financial institutions. Why its important Understanding the way money and financial institutions work is crucial to understanding the economy.

The History of Money In the monetary system goods and services are indirectly exchanged using money, which can then be exchanged for other goods and services.

The History of Money Money can be anything that people accept as a standard for payment. Coins Currency Checks Credit/Debit Cards

The History of Money In other times and places people have used shells, stones, corn or other crops, animals, parrot feathers, and even gopher tails for money.

Functions of Money 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

Characteristics of Money 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 continued

Banks are businesses that provide financial services to make a profit. 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?

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

Banking The banking system is the main type of financial institution, or organization for managing money, in our economy. 3 Standard Types of banks Commercial Credit Union Savings & Loan

Banking Ways of doing banking that do not involve a physical location Online Banking- Allows users to do a lot the activities on-line that are conducted at the physical location Virtual Bank - A bank that is completely online with no physical location.

Banking or Financial Software These programs can aid with handling financial needs. Such as budgeting, tracking money, and saving. Microsoft Money Quicken Microsoft Excel.

Commercial Banks Commercial banks offer a full range of services such as checking and savings accounts, loans, and financial advice. They are often called full-service banks.

Commercial Banks To make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.

Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans. 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.

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.

Credit Unions Credit unions are nonprofit banks set up by organizations for their members to use.

Credit Unions Credit unions offer members a full range of services, including credit cards, checking accounts, and loans. Credit unions offer low-interest loans and pay high interest rates on savings accounts

Functions of a bank Storing Money Transferring Money Lending/Loaning Money

Storing Money A bank account is a record of how much money a customer has put in to or taken out of a bank. The money put in a bank is called a deposit. The money put in a bank is called a deposit.

Storing Money Checking 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. Savings accounts are used for storing money over a long period of time.

Storing Money Interest 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.

Transferring Money Banks make it easy to transfer money from one person or business to another. Today 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.

Lending Money The money you deposit in a bank makes it possible for the bank to lend money to other customers.

Lending Money Most bank loans require some form of collateral (something valuable you put up for a loan.) The four main types of loans that banks offer are: A mortgage loan A commercial loan An individual loan A line of credit continued

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. Many banks offer credit cards. Banks also manage trust funds, such as an inheritance.

Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business. Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses. Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers

Federal Reserve System The Fed is central banking organization in the US 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