1. Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 6........................ Understanding Financial Issues

2. Copyright ©2003 Prentice Hall, Inc. 14 - 2 Chapter 14 Understanding Money and Banking

3. Copyright ©2003 Prentice Hall, Inc. 14 - 3 A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins to rain. ~ Mark Twain

4. Copyright ©2003 Prentice Hall, Inc. 14 - 4 Key Topics Money and its forms in the U.S. U.S. financial institutions How banks create money and how they are regulated The Federal Reserve system Changes in the financial industry International banking and finance

5. Copyright ©2003 Prentice Hall, Inc. 14 - 5 Portability Divisibility Durability Stability What Is Money?

6. Copyright ©2003 Prentice Hall, Inc. 14 - 6 The Functions of Money Medium of Exchange Store of Value Unit of Account

7. Copyright ©2003 Prentice Hall, Inc. 14 - 7 The Cost of Producing U.S. Coins Golden Dollar 10.03 cents Half Dollar 9.93 cents Quarter 4.29 cents Dime 1.88 cents Nickel 3.13 cents Penny.81 cents Source: http://www.usmint.gov/faqs/circulating_coins

8. Copyright ©2003 Prentice Hall, Inc. 14 - 8 Just How Much Is a Ton of Money Worth? Dollar Bills $908,000 Quarters $40,000 Pennies $3,632 Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money www.cis.state.mi.us/ofic/consumer/kids/ton_money

9. Copyright ©2003 Prentice Hall, Inc. 14 - 9 The Money Supply M1: Spendable Currency Demand deposits M2: Spendable plus Convertible Time deposits Money market mutual funds Savings deposit

10. Copyright ©2003 Prentice Hall, Inc. 14 - 10 19641969197419841984198919942001 5.45.0 4.4 4.0 3.4 3.0 2.4 2.0 1.4 1.0 0 0.4 Money Supply (trillions) Money Supply Growth M-1 M-2

11. Copyright ©2003 Prentice Hall, Inc. 14 - 11 Credit Cards A Major Financial Force Credit cards accounted for almost half of all transactions for the year 2000 Credit cards are a large and growing business Convenient for users Highly profitable for issuers

12. Copyright ©2003 Prentice Hall, Inc. 14 - 12 U.S. Financial Institutions Commercial Banks Diversification and mergers Commercial interest rates Savings and Loan Associations Mutual Savings Banks

13. Copyright ©2003 Prentice Hall, Inc. 14 - 13 U.S. Financial Institutions Credit Unions Non-Deposit Institutions Pension funds Insurance companies Finance companies Securities investment dealers

14. Copyright ©2003 Prentice Hall, Inc. 14 - 14 Special Financial Services Individual Retirement Accounts (IRAS) Trust Services International Services Currency exchange Letters of credit Bankers acceptance

15. Copyright ©2003 Prentice Hall, Inc. 14 - 15 Special Financial Services Financial advice and brokerage services Automated teller machines Electronic funds transfer

16. Copyright ©2003 Prentice Hall, Inc. 14 - 16 Banks As Creators of Money $100.00$10.00$90.00$190.00 90.009.0081.00271.00 81.008.1072.90343.00 72.907.2965.61409.51 65.616.5659.05468.56 Deposit Money held in Reserve by Bank Money to Lend Total Supply

17. Copyright ©2003 Prentice Hall, Inc. 14 - 17 The Federal Reserve System Structure Board of governors Reserve banks Member banks Functions Banking for the government Banking for banks Controlling the money supply

18. Copyright ©2003 Prentice Hall, Inc. 14 - 18 Reserve requirements Discount rate controls Open market operations Selective credit controls Controlling the Money Supply The Tools of the Fed

19. Copyright ©2003 Prentice Hall, Inc. 14 - 19 The Changing Money and Banking System Interstate BankingDeregulation

20. Copyright ©2003 Prentice Hall, Inc. 14 - 20 Electronic Technologies A Dramatic Change Debit Cards Smart Cards E-cashE-cash

21. Copyright ©2003 Prentice Hall, Inc. 14 - 21 The International Payments Process Olive Exchange (Greece to U.S.) Equipment Exchange (U.S. to Greece.) U.S. ImporterU.S. ExporterU.S. Bank Greek ExporterGreek ImporterGreek Bank 1 2 3 4 5 67 8

22. Copyright ©2003 Prentice Hall, Inc. 14 - 22 Bolstering International Trade International Monetary Fund (IMF) Stable exchange rates Temporary short-term loans Cooperation on global monetary issues International payments system World Bank Provides a limited scope of financial services World Bank Provides a limited scope of financial services

23. Copyright ©2003 Prentice Hall, Inc. 14 - 23 Chapter Review Define money and its forms in the U.S. Describe U.S. financial institutions Explain how banks create money and how they are regulated Discuss the functions and tools of the Federal Reserve system Identify how the financial industry is changing Understand international banking and finance