1. McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc. All rights reserved. Money and the Financial System 15

2. 15-2

3. 15-3 Money in the Financial System Finance –The study of money-- how it’s made, how it’s lost, and why Money –Anything generally accepted in exchange for goods and services

4. 15-4 The Functions of Money Medium of exchange –Accepted as payment for products and resources Measure of value –Single standard for assigning and comparing values of products and resources Store of value –Means of retaining and accumulating wealth

5. 15-5 The Characteristics of Money Acceptability Divisibility Portability Stability Durability Difficulty to counterfeit

6. 15-6 The Life Expectancy of Paper Currency Did You Know? Experts estimate that more than $130 million in counterfeit U.S. bills is circulating around the world.

7. 15-7 Types of Money Checking account Savings account Money market account Certificate of deposit Credit card Debit card Traveler’s check Money order Cashier’s check

8. 15-8 A Check

9. 15-9 Facts About Checks About 13 million US households do not have checking accounts. 180 million checks are cashed annually in 3,700 check-cashing stores for a value of $55 billion. 85% of checks cashed are payroll checks and the average check is about $300.

10. 15-10 Facts About Credit Cards MasterCard and Visa are the 2 major credit cards. American Express is the dominant travel & entertainment credit card. Americans hold over $675 billion in credit card debt.

11. 15-11 Facts About Debit Cards A debit card looks like a credit card but works like a check. A debit card gives a direct, immediate electronic payment to a merchant from the cardholder’s checking account. They lack credit, offer no “grace period,” and provide no paper trail of transactions.

12. 15-12 The American Financial System The Federal Reserve System –An independent agency of the federal government established in 1913 to regulate the nation’s banking and financial industry Banking Institutions –Businesses whose objective is to earn money by managing, safeguarding, and lending money to others

13. 15-13 The Federal Reserve System

14. 15-14 The Functions of the Federal Reserve Board To control the money supply with monetary policy To regulate financial institutions To manage regional and national check- clearing procedures To supervise the federal deposit insurance of commercial banks in the Federal Reserve system

15. 15-15 The Federal Reserve’s Monetary Policies Open market operations Reserve requirements Discount rate Credit controls

16. 15-16 Fed Tools for Regulating the Money Supply

17. 15-17 Banking Institutions Commercial banks Savings and loan associations Credit unions Mutual savings banks

18. 15-18 Insurance for Banking Institutions Federal Deposit Insurance Corporation (FDIC) –Insures personal accounts up to a maximum of $100,000 National Credit Union Association (NCUA) –Regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund

19. 15-19 Non-Banking Institutions Insurance companies Pension funds Mutual fund Brokerage firms Non-financial firms Finance companies

20. 15-20 Leading Diversified Financial Services Firms

21. 15-21 Electronic Banking ETF –Electronic funds transfer ATM –Automated teller machines ACHs –Automated clearinghouses Online banking

22. 15-22 ATM Facts The top 5 ATM owners are Bank of America, Wells Fargo, E-Trade Bank, American Express, and Bank One. The average ATM withdrawal is $60. ATM customers spend 20-25% more than non-ATM customers. 60% of Americans ages 25-34 use ATMs 8 times a month. The most popular day for ATM usage is Friday. Source: “ATM Fact Sheet,” Press Room: ATMfacts 2001, September 18,2001.

23. 15-23 Challenge and Change in the Commercial Banking Industry Some commercial banks made poor managerial decisions in the early 1980s, resulting in several failures. Gramm-Leach-Bliley Bill –Banks were allowed to offer insurance, brokerage, and investment banking services.

24. 15-24 Solve the Dilemma 1.List the various types of U.S. financial institutions and the primary functions of each. 2.What services of each financial institution is Hill’s new company likely to need? 3.Which single financial institution is likely to best meet Hill’s small company’s needs now?

25. 15-25 Explore Your Career Options In what industries are economists likely to be asked to provide economic projections?

26. 15-26 Additional Discussion Questions and Exercises 1.Look at Figure 15.3 in your textbook and determine in which of the 12 Federal Reserve Districts you are located. –What is the nearest Federal Reserve bank city or Federal Reserve branch city? 2.What is meant by a demand deposit?

27. 15-27 Additional Discussion Questions and Exercises 3.Why have credit cards become a popular substitute for money? 4.What are the advantages of automated teller machines (ATMs) for customers? For banks?

28. 15-28 Chapter 14 Quiz 1.Most paper currency is lightweight; the weight of money applies to which characteristic of money? a.Durability b.Stability c.Divisibility d.Portability 2.The percentage of deposits that a banking institution must hold in reserve, either in the bank itself or in a Federal Reserve Bank, and not loan to businesses or individuals is the: a.Discount rate b.Reserve requirement c.M1 d.Depository insurance

29. 15-29 Chapter 14 Quiz 3.The largest of all banking institutions in the United States are: a.savings and loan associations b.commercial banks c.credit unions d.mutual savings banks 4.The failure of the savings and loan associations and the problems in some commercial banks were caused primarily by: a.high government taxes on banking institutions b.bad real estate loans c.failure of students to repay college loans d.electronic funds transfer

30. 15-30 Multiple Choice Questions about the Video 1.Bank One first began operations in: a.1863 b.1983 c.1871 d.2004 2.The merger of Bank One and J.P. Morgan Chase created the ______ largest bank in the United States in 2004. a.first b.second c.third d.fourth