Instructor Lecture PowerPoints Money and Banking Business Essentials, 8th Edition Ebert/Griffin Instructor Lecture PowerPoints PowerPoint Presentation prepared by Carol Vollmer Pope Alverno College Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 1

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to: Define money and identify the different forms that it takes in the nation’s money supply. Describe the different kinds of financial institutions that comprise the U.S. financial system and explain the services they offer. Explain how financial institutions create money and describe the means by which they are regulated. In this chapter we will study money and banking. We will define money and identify the different forms that it takes in the nation’s money supply. We will then describe the different kinds of financial institutions that comprise the U.S. financial system and explain the services they offer. Next we will explain how financial institutions create money and describe the means by which they are regulated. Teaching Tips: Form a team with another student. In your teams, please select one of the learning objectives we just reviewed. Please prepare a brief introduction to the topic. We will share our answers with the class. Answers will vary. You can wait to comment on the answers until you have covered the material later in the chapter. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-2

L E A R N I N G O B J E C T I V E S (cont.) After reading this chapter, you should be able to: 4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply. Identify three important ways in which the money and banking system is changing. Discuss some of the institutions and activities in international banking and finance. We will discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply. We will also identify three important ways in which the money and banking system is changing. Finally, we will discuss some of the institutions and activities in international banking and finance. Teaching Tips: In your student teams, please prepare a brief introduction to one of the learning objectives above. We will share our answers with the class. Answers will vary. You can wait to comment on the answers until you have covered the material later in the chapter. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-3 3

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall What’s in It for Me? By understanding this chapter’s discussion of money and banking, you’ll benefit in the following way: The chapter explains what money is, where it comes from, how the supply of money grows, how it is created and controlled, and the kinds of services available to money users from the financial services industry. What’s in it for you? By understanding this chapter’s discussion of money and banking, you’ll benefit in the following way: The chapter explains what money is, where it comes from, how the supply of money grows, how it is created and controlled, and the kinds of services available to money users from the financial services industry. Teaching Tips: In your student teams, please discuss what you believe you will learn. Answers will vary. Your responses can wait until later in the class once the material has been covered. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-4

The Characteristics of Money Money must have: Portability Divisibility Durability Stability Money is usually printed paper or imprinted coins. Money is used to pay for goods and services, and it must have the following four characteristics: Portability Divisibility Durability Stability Teaching Tips: In your student teams, please choose one of the characteristics of money. Then please discuss why money needs to have your characteristic. Answers will vary but can reflect examples from the text. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-5

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall The Functions of Money Medium of Exchange Store of Value Let’s discuss the functions of money. There are three basic functions: It must be used as a medium of exchange. It must be a store of value. It must be a measure of worth. Teaching Tips: In your student teams, please choose one of the functions of money and discuss why it is important. Answers will vary and should include: Medium of exchange: A way to have a common method to exchange goods and services. Store of value: In a form that can be stored and saved. Measure of worth: A common way to value items. Measure of Worth Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-6

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall The Money Supply M1: Spendable Money Supply Currency (paper money and coins) Checks Checking accounts—demand deposits in banks M2: M1 + Convertible Money Supply Time deposits Money market mutual funds Savings accounts Now let’s discuss the money supply. There are three levels: M1, M2, and M3. M1 is the spendable money supply. This includes currency, or paper money and coins. This also means checks and checking accounts, which includes demand deposits in banks. M2 is M1 plus the convertible money supply. This includes time deposits such as CDs, money market mutual funds, and savings accounts. Teaching Tips: In your student teams please discuss the difference between M1 and M2. We will share our answers with the class. Answers should reflect the material just covered. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-7

FIGURE 15.1 Money Supply Growth Let’s look at Figure 15.1, which addresses the growth in the money supply. In the 1980s, M2 began growing at a much faster rate than M1. Why? Mainly because new types of investments and investment funds, many offering higher-interest returns, were introduced at this time. M2 is now the more reliable indicator of the country’s economic status. Teaching Tips: In your student teams, please discuss the growth of the money supply. What are your opinions about the money supply during the next two years? Answers will vary. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-8

The U.S. Financial System Financial Institutions Commercial Banks Companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners Savings and Loan Associations (S&Ls) Accept deposits, make loans, and are owned by investors Mutual Savings Banks All depositors are owners of the bank, so all profits are divided proportionately among depositors via dividends Credit Unions A nonprofit, cooperative financial institution owned and run by its members; promotes thrift Next let’s review the U. S. Financial System and its financial institutions. Financial institutions include the following: Commercial Banks: These are companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners. Saving and Loan Associations or S&Ls: These institutions accept deposits, make loans, and are owned by investors. Mutual Savings Banks: All depositors are owners of the bank, so all profits are divided proportionately among depositors via dividends. Credit Unions: These are non-profit, cooperative financial institutions owned and run by their members. They promote thrift savings. Teaching Tips: In your student groups, please choose one of the four types of financial institutions we have reviewed. Then please come up with three reasons why your choice might be the best place for investments. Be sure to define who your target market might be for your type of institution. Answers will vary. Commercial banks’ customers are companies. Savings and loans’ customers are usually consumers who work. Mutual savings banks’ customers are also consumers who work. Credit Unions are usually made up of members of a specific trade or type of work, such as teachers’ credit union, etc. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-9

The U.S. Financial System (cont.) Non-Deposit Institutions Unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors Pension funds Insurance companies Finance companies Securities investment dealers It is also important to review non-deposit institutions. Unlike at commercial banks, inflowing funds are intended for purposes other than earning interest for depositors. These include the following: Pension funds Insurance companies Finance companies Securities investment dealers Teaching Tips: In your student teams, choose one of the four types of non-deposit institutions we have just reviewed. Then please prepare a brief description of how your selected institution functions. Answers will vary but should relate to information provided by the text on each of the four types of non-deposit institutions. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-10

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall FIGURE 15.2 The Prime Rate Figure 15.2 tracks the prime rate from 1996 to 2008. Banks only offer the lowest or prime rate to their best commercial customers. Most banks offer loans and prime + 1%, which means 1% over the prime rate. Some people go to foreign banks and get funds at a lower rate, so now some banks offer loans at less than prime. Teaching Tips: In your student teams please discuss how the prime rate has been used to deal with the economic crisis in 2008. We will share our responses with the class. The prime rate was lowered significantly to 3.5% to try to stimulate the economy. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-11

Special Financial Services Individual Retirement Accounts (IRAs) Trust Services International Services Currency exchange Letters of credit Banker’s acceptance Financial Advice and Brokerage Services Electronic Funds Transfer (EFT) Automated Teller Machines (ATMs) There are also many special financial services that we will review. The first are Individual Retirement Accounts or IRAs: These are investment accounts controlled by an individual that cannot be accessed without a penalty before the investor turns 59½ years old. The money can be invested from a paycheck, lowering an individual’s income. An employer may match funds in some IRAs. The funds are taxed at the time they are withdrawn, when a person’s income will be lower. Trust services: These are services that set money aside in a trust fund. Many baby boomers have made provisions for when they die by setting up trust accounts for their children. International services: These services include currency exchange, letters of credit for companies to be able to purchase internationally, and banker’s acceptance. Financial advice and brokerage services: There are many firms that provide financial advice and also offer brokerage services for buying and selling stocks, bonds, and mutual funds. Electronic Funds Transfer or EFT: Using EFT, a company or individual can transfer money between accounts and institutions or pay bills online. Automated Teller Machines or ATMs: Allow consumers to withdraw or deposit funds anywhere in the world. Teaching Tips: In your student teams, please choose one of these special financial services. Then please prepare a sample advertisement to the appropriate target audience for the service you chose. We will share our examples with the class. Responses will vary but should be aimed at the appropriate target market or audience for the service. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-12

FIGURE 15.3 Global Dispersion of ATMs Figure 15.3 displays the global dispersion of ATMs. Teaching Tips: In your student teams, please choose one of the four regions noted in the graph. Please discuss why you think the rate is at the level it is and how it might increase or decrease in the future. We will share our answers with the class. Answers will vary. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-13

FIGURE 15.4 How Banks Create Money Figure 15.4 shows how banks create money. They don’t print bills, but they do accept deposits and make loans, thus expanding the money supply. Teaching Tips: In your student teams, please prepare a brief explanation of this figure and how banks create money. We will share our responses. Answers should reflect the explanation in the text. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-14

Regulation of the Banking System Federal Deposit Insurance Corporation (FDIC) Preserves confidence by supervising banks and insuring deposits in banks and thrift institutions Commercial banks pay fees for membership in the FDIC Guarantees the safety of all deposits of every account owner up to the current maximum of $250,000 Maintains the right to examine the activities and accounts of all member banks Now let’s look at the regulation of the banking system. The U.S. banking system is regulated by the Federal Deposit Insurance Corporation, or FDIC. The FDIC preserves confidence in the financial system by supervising banks and insuring deposits in banks and thrift institutions. Commercial banks pay fees for membership in the FDIC. The FDIC guarantees the safety of all deposits of every account owner up to the current maximum of $250,000, up from its regular rate of $100,000, through the end of 2009 as part of the federal government’s bail-out of the U.S. banking system. The FDIC also lifted the $250,000 limit for business non-interest bearing transaction accounts as part of the bail-out. The FDIC maintains the right to examine the activities and accounts of all member banks. Teaching Tips: Please discuss in your student teams the impact of the Federal U.S. government bail-out of the U.S. banking system through the FDIC. We will share our thoughts with the class. Answers will vary based on the timing of this class. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-15

The Federal Reserve System The Fed: The Nation’s Central Bank Structure Board of governors Reserve banks Open market committee Member banks Other depository institutions The Federal Reserve System is an important regulator of the U.S. economy. The Fed is the nation’s central bank. Its structure includes: A board of governors Reserve banks An open market committee Member banks Other depository institutions Teaching Tips: In your student teams, please choose one of the elements of the Federal Reserve System and prepare a brief description about it. We will share our descriptions with the class. Answers should reflect the information in the text on each element of the structure. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-16

FIGURE 15.5 The Twelve Federal Reserve Districts Figure 15.5 shows us the twelve federal reserve districts and their key cities. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-17

The Federal Reserve System (cont.) Functions Banking for the government Banking for banks Controlling the money supply Controlling inflation The Federal Reserve system provides the following functions: Banking for the government Banking for banks Controlling the money supply Controlling inflation Teaching Tips: In your student teams, please select one of the four functions of the Fed. Please prepare a brief description of your chosen function. We will share our description with the class. Answers should reflect the descriptions of each function in the text. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-18

Controlling the Money Supply Monetary Policy The Fed manages the nation’s economic growth by managing money supply and interest rates Tools of the Fed Reserve requirements Discount rate controls Open market operations Selective credit controls The Federal Reserve controls the monetary policy of the United States. It manages the nation’s economic growth by managing the money supply and interest rates. The Fed uses four tools to accomplish this task: Reserve requirements Discount rate controls Open market operations Selective credit controls Teaching Tips: In your student teams, please choose one of the four tools of the Fed. Then please prepare a brief description of how the Fed uses your selected tool. We will share our descriptions with the class. Answers should reflect material from the text on each tool. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-19

The Changing Money and Banking System Government Intervention Government Emergency Investment Assurances of Repayment Anti-Crime and Anti-Terrorism Regulations Bank Secrecy Act (BSA) U.S. Patriot Act Customer Identification Program (CIP) With a goal of stabilizing the U. S. financial system, the government infused funds, close to $300 billion by mid-2009, into the financial system. To insure repayment, these funds are secured by the assets of the banks receiving the government funds. The government also works to control terrorism through regulations. The Bank Secrecy Act, or BSA, was created to monitor suspicious banking transactions after the 9/11/2001 terrorist attacks. Certain banking transactions, such as multiple wire transfers over $10,000, could signal funding of terrorism. The U.S. Patriot Act, which we have discussed earlier in this course, contains a Customer Identification Program, also known as CIP, which makes banks keep records and compare them with suspected terrorist lists. Teaching Tips: In your student teams, please discuss how well these anti-terrorism regulations have worked, in your opinions. We will share our opinions with the class. Answers will vary. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-20

The Impact of Electronic Technologies Check 21 Allows banks to present a substitute check for payment instead of the original check Blink Credit Cards A “contactless” payment system Debit Cards Allow the transfer of money between accounts Used with point-of-sale (POS) terminals Electronic technologies have impacted banking in a number of ways. Let’s examine them: First, there is Check 21, which allows banks to present a substitute check for payment instead of the original check. Second, there are blink credit cards, which are a “contactless” payment system. Third, there are debit cards, which allow the transfer of money between accounts and which are used with point-of-sale (POS) terminals. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-21

The Impact of Electronic Technologies (cont.) Smart Cards Credit-card-size plastic cards with an embedded computer chip that can be programmed with “electronic money” E-Cash Money that moves via digital transmissions on the Internet, outside the established network of banks, checks, and paper currency overseen by the Fed Fourth there are smart cards, which are credit-card-size plastic cards with an embedded computer chip that can be programmed with “electronic money.” These are used in developing countries where access to physical banks is limited. Fifth is e-cash, which is money that moves via digital transmissions on the Internet, outside the established network of banks, checks, and paper currency overseen by the Fed. Teaching Tips: In your student teams, please choose one of the five electronic technologies we have just reviewed. Please prepare an example of where, who, and how your selected technology might be used. We will share our answers with the class. Answers should reflect material from the text, but could also include information from student experience or outside readings. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-22

International Banking and Finance World Bank Provides a limited scope of financial services International Monetary Fund (IMF) Promotes the stability of exchange rates Provides temporary, short-term loans to member countries Encourages members to cooperate on international monetary issues Encourages development of a system for international payments Now let’s take a few minutes to address international banking and finance. There is no worldwide banking system with the same type of controls or systems as The Fed. The United Nations has two different organizations that provide worldwide assistance. First let’s take a look at the World Bank. This bank provides a limited scope of financial services that fund global infrastructure projects. Second let’s look at the International Monetary Fund, or IMF. This organization: Promotes the stability of exchange rates Provides temporary, short-term loans to member countries Encourages members to cooperate on international monetary issues Encourages development of a system for international payments Teaching Tips: In your student teams please pick a country in Latin America. Once you have chosen the country, please think of how either the World Bank or IMF could provide assistance to that country. Answers will vary by country, but most countries in Latin America need assistance with rural infrastructure. Argentina, for example, has had a financial crisis twice during this decade, and the IMF intervened with a number of its tools. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-23

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Key Terms automated teller machine (ATM) banker’s acceptance check checking account (demand deposit) commercial bank credit union currency (cash) debit card discount rate corporation (FDIC) e-cash electronic funds transfer (EFT) Federal Deposit Insurance Federal Reserve System (the Fed) finance company There are many key terms that we learned in this chapter. Teaching Tips: Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-24

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Key Terms (cont.) monetary policy money money market mutual fund mutual savings bank open-market operations pension fund point-of-sale (POS) terminal prime rate reserve requirement float individual retirement account (IRA) insurance company International Monetary Fund (IMF) letter of credit M1 M2 M3 There are many key terms that we learned in this chapter. Teaching Tips: Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-25

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Key Terms (cont.) short-term solvency ratio smart card solvency ratio statement of cash flows tax services time deposit trust services World Bank revenue recognition revenues Sarbanes-Oxley Act of 2002 (Sarbox) savings and loan association (S&L) securities investment dealer (broker) selective credit controls There are many key terms that we learned in this chapter. Teaching Tips: Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-26

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 15-27 27 27