Vocabulary Currency- Coins and paper bills used to purchase goods/services. Certificate of Deposit- Earns a higher interest rate than a savings/checking account but you are unable to have access to your money for a set period of time Stocks- Ownership shares of a corporation that can be bought and sold Monetary Policy- Conducted by “The Fed”, it is the increasing or decreasing of the money supply. Fed- The national bank of the United States.

Money and the Banking System

Why does money have value? We are absolutely certain that someone else will accept its value as well.  Medium of Exchange  Money can be exchanged for any good or service

Functions of Money Medium of Exchange Barter System PPeople had to trade goods or services they possessed for goods or services they wanted VVery inconvenient TThis caused the creation of money to use for a medium of exchange Measure of Value MMoney assigns a value to a good or service and can then be exchanged in the market place

Types of Money Coins: Metallic forms of money such as pennies, nickels, etc. Currency: Both (coins and paper)

Spending, Borrowing, and Investment Spending Money  Checking Accounts  Called Demand Deposits because your money is available “on demand”  Used by writing a check or using a debit card  Credit  Credit Cards act as a loan  The purchaser is deferring payment until a later date and must pay interest on the purchase  Certificate of Deposit (CD)  Called Time Deposits because you only have access to your money after a set amount of time  Earn a higher interest rate than a checking/savings account

Types of financial institutions Demand Deposit and Time Deposit Accounts are usually held at either a commercial bank, credit union or savings and loan 1. Commercial Banks - Receive deposits of money, extend credit, and provide loans - Banks make money on the interest they collect from loans - Collateral - Requirement to obtain a loan, collateral is anything of value that can be used to cover the cost of the loan if you don’t pay 2. Savings and Loans - Traditionally loaned money to people buying homes 3. Credit Unions - Open only to workers of a certain group - Can offer higher interest rates to its customers

Stocks, Bonds, and Mutual Funds Stocks  Shares in a company that an individual purchases giving that person part ownership  Can be very rewarding and very risky  AFLAC and ENRON Mutual Funds  Helps minimize risk  Pool money from many investors to buy a range of stocks  Lower rate of return

Bonds  Bought by individuals  Loans to either a company or government

Insurance  When you buy a stock you are accepting the risk. Insurance involves transferring risk to others  Paying money to an insurance company so if what you value is lost or damaged the insurance company will pay for it

Life Insurance  Provides money to one’s family if they die  Term Life Insurance  Whole Life Insurance Health/Medical Insurance  Covers health and medical expenses Liability Insurance  Provides protection from claims arising from injuries or damage to other people/property  Homeowner, auto insurance Comprehensive Liability  Covers businesses from wide range of catastrophes

Businesses and Investment Capital Investment  Investing profits in capital to make the company more efficient Pension Funds  Mutual funds set up by employers to allow employees to save for retirement  Employees pay into the fund and gain interest

Is Your Money Safe? U.S. has one of the safest financial systems in the world. FDIC- Federal Deposit Insurance Commission -I-Insures accounts of up to $100,000 -C-Created after Great Depression

The Federal Reserve Functions: 1. Act as the gov’t bank 2. Conducting Monetary Policy  Controlling the supply of money and the cost of borrowing money

Changing the Money Supply The FED does this in 3 ways: 1. Reserve Requirement 2. Discount Rate 3. Open Market Operations

reflection What is “medium of exchange”? Why is the Barter system inconvenient? Why is a checking account called a “demand deposit”? What does a credit card company offer? Why might someone choose to put money in a Certificate of Deposit? Summarize the differences between a Commercial Bank, Savings and Loans, and Credit Unions. Why might someone choose to invest in a Mutual Fund? What is the purpose of buying insurance? What is the purpose of the FDIC? What role does the Federal Reserve play in our economy?

Closing ? What are the two ways a person can make money in the stock market? Capital gain- Sell stock for more than you bought it Dividend- Receive part of corporate profits based on how much stock you hold