PowerPoint Presentation by Charlie Cook Copyright © 2005 Prentice Hall, Inc. All rights reserved. Chapter 14 Understanding Money and Banking

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–2 Key Topics Money and its forms Financial institutions How banks create money and how they are regulated The Central Bank Changes in the financial industry International banking and finance

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–3 What Is Money? Portability:  Light and easy to handle Divisibility  Divisible into smaller parts to match money with value of products Durability Stability  Value should not fluctuate much

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–4 Functions of Money Medium of exchange:  it helps buying and selling Store of value:  Can be used for future purchases Unit of account:  Values all products in terms of money

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–5 The Money Supply (amount of money in circulation) M1: includes only the most liquid (spendable) forms of money  Currency: government issued paper money and metal coins.  Demand deposits: draw money on demand; can be a checking account  Check: instructs a bank to pay a given sum to a specified payee M2: includes M1 and forms of money that can easily be changed into spendable form: it is less liquid that M1.  Time deposits: bank funds that cannot be withdrawn without notice or transferred by check  Money market mutual funds: are operated by investment companies and consist of low risk bonds and stocks purchased with the joint assets of investors.

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–6 Money-Supply Growth Figure 14–1

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–7 Credit Cards: A Major Financial Force Credit cards accounted for over half of all transactions in the developed world. Credit cards are a large and growing business Convenient for users Highly profitable for issuers

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–8 Financial Institutions Commercial Banks: financial institution accepting deposits that it then uses to make loans and earn profits.  Diversification and mergers  Commercial interest rates  E.g., prime rate: interest rate available to a bank’s most creditworthy customer.

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–9 Financial Institutions Non-Deposit Institutions  Pension funds: invests retirement funds  Insurance companies: invests funds collected as premiums charged for insurance coverage.  Securities investment dealers (brokers): institution that buys and sells stocks and bonds or investors.

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–10 Special Financial Services International Services  Currency exchange  Letters of credit: bank promise, in the name of the buyer, to pay a designated firm a specified amount of money if certain conditions are met.  Banker’s acceptance: bank promise, in the name of the buyer, to pay a designated firm a specified amount at a future date. Financial advice and brokerage services Automated teller machines Electronic funds transfer

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–11 How Banks Create Money Figure 14–3

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–12 The Central Bank Structure  Board of governors  Member banks Functions  Banking for the government: produces currency and lends money to the government  Banking for banks: check clearing and float  Controls the banking community:  Controlling the money supply: monetary policy (money supply and interest rates) and inflation management

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–13 Controlling the Money Supply: The Tools of the Central Bank Reserve requirements:  Percentage of deposits a bank must hold (cannot lend out). Discount rate controls:  Percentage at which a bank can borrow money from the central bank. Open market operations:  purchase or sell government bonds on the open market. Selective credit controls

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–14 The Changing Money and Banking System Deregulation and global competition and technology.

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–15 Electronic Technologies: A Dramatic Change Debit Cards Smart Cards E-cashE-cash

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–16 International Payments Process Figure 0–5

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–17 Bolstering International Trade World Bank  Provides a limited scope of financial services International Monetary Fund (IMF)  Stable exchange rates  Temporary short-term loans  Cooperation on global monetary issues  International payments system

Copyright © 2005 Prentice Hall, Inc. All rights reserved.14–18 Chapter Review Define money and its forms in the Describe financial institutions. Explain how banks create money and how they are regulated. Discuss the functions and tools of the Central Bank. Identify how the financial industry is changing. Understand international banking and finance.