20-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 2020 Understanding Money and Financial Institutions 20-1

20-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What is Money? Anything people generally accept as payment for goods and services

20-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Money Supply Currency Demand Deposits = Total M1 + Time Deposits & Money Market Accts. Total M2 + =

20-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Money Supply The Money Supply Why Do We Care?

20-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Federal Reserve

20-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Reserve – Banking System Commercial Banks Thrift Institutions (Savings and Loan Associations, Mutual Savings Banks, Credit Unions) The Public (Households and Businesses) 12 Federal Reserve Banks Board of Governors Federal Open Market Committee LO3

20-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Regional Reserve Banks

20-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Federal Reserve The Banker’s Bank Holds the deposits of commercial banks and makes loans to banks that need additional funds

20-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Fed Regulates Money Supply Increase / Reduce Money Supply Increase / Reduce Money Supply I.Reserve Requirement II.Open Market Operations III.Discount Rate

20-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Reserve Requirement Percentage of commercial bank’s checking and savings accounts that must be physically kept in its bank or as on deposit at the local Federal Reserve district bankPercentage of commercial bank’s checking and savings accounts that must be physically kept in its bank or as on deposit at the local Federal Reserve district bank Most powerful toolMost powerful tool

20-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Open-Market Operations Involves buying and selling of U.S. Government bonds by the Fed with goal of regulating money supplyInvolves buying and selling of U.S. Government bonds by the Fed with goal of regulating money supply Most commonly used toolMost commonly used tool

20-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Discount Rate Interest rate that Fed charges for loans to member banks Member banks borrow money from the Fed and pass it on to their customers – Prime Rate Fed also sets the rate that banks charge each other – Federal Funds Rate

20-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Fed Regulates Money Supply Increase Money Supply Reduce Reserve Requirement Buy Government Bonds Decrease Discount Rate Expand Reduce Money Supply Increase Reserve Requirement Sell Government Bonds Increase Discount Rate Slow Down

20-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. American Banking System Depository Non-Depository

20-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. American Banking System Depository

20-16 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Commercial Banks Profit-making organizations that receive deposits from individuals and corporations in the form of checking and savings accounts and then uses some of these funds to make loans Two types of customers: – –Borrowers and Depositors

20-17 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Savings and Loans (S&Ls) Accepts both savings and checking deposits and provides home mortgage loans Often known as Thrift Institutions Offered higher interest rates to attract funds

20-18 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Credit Unions Not-for-profit, member- owned financial cooperatives that offer the full variety of banking services to their membersNot-for-profit, member- owned financial cooperatives that offer the full variety of banking services to their members State or Federally charteredState or Federally chartered Have exemption from federal income taxesHave exemption from federal income taxes

20-19 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. American Banking System Non-Depository

20-20 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. American Banking System Non-Depository Life Insurance Companies Pension Funds Brokerage Firms Finance Companies

20-21 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. How the Government Protects Your Funds - - FDIC - - $250,000/Account - - SAIF(FSLIC) - - $250,000/Account - - NCUA - - $250,000/Account

20-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Banking Letter of Credit – –Promise to pay seller given amount if certain conditions met Banker’s Acceptance – –pay specified amount at particular time Currency Exchange – –Fluctuations

20-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Banking World Bank – –(aka International Bank for Reconstruction and Development) – finances economic development

20-24 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Banking International Monetary Fund (IMF) – –Established to assist in the smooth flow of money among all nations – –Monitors the monetary policies of member nations to ensure a global monetary system that works best for all nations.