1. E. Napp Banking Today In this lesson, students will be able to identify important terms concerning banking. Students will be able to identify and/or define the following terms: M1 and M2 Principal Interest Default

2. E. Napp The money supply is all the money available in the United States.

3. E. Napp M1 The money supply consists of M1 and M2. M1 is money that people can easily use to pay for goods and services. Cash and checks are examples of M1.

4. E. Napp Checks are examples of M1. M1 has liquidity. Liquidity means it can be used easily as money.

5. E. Napp M2 M2 consists of M1 and several other assets. M2 includes savings accounts and mutual funds. These assets must be converted to cash before they are used.

6. E. Napp A bond must be converted to cash before it can be used.

7. E. Napp Interest When money is deposited in a bank, the customer receives interest on the money. A person who borrows money must pay interest. Interest is the price of borrowed money.

8. E. Napp Interest is the price of borrowed money.

9. E. Napp Default When a person fails to pay back a loan, he has defaulted on the loan. Defaulting on a loan leads to bad credit and higher interest rates in the future. By defaulting, a person ruins his reputation for repaying a loan.

10. E. Napp Defaulting on a loan leads to bad credit and higher interest rates in the future.

11. E. Napp Principal and Interest There are two parts to any loan: principal and interest. The principal is the actual amount borrowed. The interest is the money a customer pays above the principal for the opportunity to borrow money.

12. E. Napp A mortgage is a loan on real estate.

13. E. Napp By learning the language of banking, a person makes better choices.

14. E. Napp Questions for Reflection: What is the money supply? How does M1 differ from M2? Provide an example of an object that has liquidity. Why does it harm a person to default on a loan? What does a loan consist of? How does principal differ from interest?