15 chapter Money and Banking Business Essentials 7

15 chapter Money and Banking Business Essentials, 7 th Edition Ebert/Griffin Instructor Lecture Power. Points Power. Point Presentation prepared by Carol Vollmer Pope Alverno College © 2009 Pearson Education, Inc.

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LEARNING OBJECTIVES After reading this chapter, you should be able to: 1. Define money and identify the different forms that it takes in the nation’s money supply. 2. Describe the different kinds of financial institutions that comprise the U. S. financial system and explain the services they offer. 3. Explain how financial institutions create money and describe the means by which they are regulated. 4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply. © 2009 Pearson Education, Inc.

L E A R N I N G O B J E C T I V E S (cont’d) After reading this chapter, you should be able to: 5. Identify three important ways in which the money and banking system is changing. 6. Discuss some of the institutions and activities in international banking and finance. © 2009 Pearson Education, Inc.

What’s in It for Me? By understanding this chapter’s discussion of money and banking, you’ll benefit in the following way: • The chapter explains what money is, where it comes from, how the supply of money grows, how it is created and controlled, and the kinds of services available to money users from the financial services industry. © 2009 Pearson Education, Inc.

The Characteristics of Money • Money must have: – Portability – Divisibility – Durability

The Functions of Money Medium of Exchange Store of Value Measure of Worth ©

The Money Supply • M 1: Spendable Money Supply – Currency (paper money and coins) – Checks – Checking accounts—demand deposits in banks • M 2: M 1 + Convertible Money Supply – Time deposits – Money market mutual funds – Savings accounts © 2009 Pearson Education, Inc.

FIGURE 15. 1 Money Supply Growth © 2009 Pearson Education, Inc.

The U. S. Financial System • Financial Institutions – Commercial Banks • Companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners – Savings and Loan Associations (S&Ls) • Accept deposits, make loans, and are owned by investors – Mutual Savings Banks • All depositors are owners of the bank, so all profits are divided proportionately among depositors via dividends – Credit Unions • A nonprofit, cooperative financial institution owned and run by its members; promotes thrift © 2009 Pearson Education, Inc.

The U. S. Financial System (cont’d) • Non-Deposit Institutions – Unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors • • Pension funds Insurance companies Finance companies Securities investment dealers © 2009 Pearson Education, Inc.

FIGURE 15. 2 The Prime Rate © 2009 Pearson Education, Inc.

Special Financial Services • Individual Retirement Accounts (IRAs) • Financial Advice and Brokerage Services • Trust Services • Electronic Funds Transfer (EFT) • International Services – Currency exchange – Letters of credit • Automated Teller Machines (ATMs) – Banker’s acceptance © 2009 Pearson Education, Inc.

FIGURE 15. 3 Global Dispersion of ATMs © 2009 Pearson Education, Inc.

FIGURE 15. 4 How Banks Create Money © 2009 Pearson Education, Inc.

Regulation of the Banking System • Federal Deposit Insurance Corporation (FDIC) – Preserves confidence in the financial system by supervising banks and insuring deposits in banks and thrift institutions – Commercial banks pay fees for membership in the FDIC – The FDIC guarantees the safety of all deposits of every account owner up to the current maximum of $250, 000 – The FDIC maintains the right to examine the activities and accounts of all member banks © 2009 Pearson Education, Inc.

The Federal Reserve System • The Fed: The Nation’s Central Bank – Structure • Board of governors • Reserve banks • Open market committee • Member banks • Other depository institutions © 2009 Pearson Education, Inc.

FIGURE 15. 5 The Twelve Federal Reserve Districts © 2009 Pearson Education, Inc.

The Federal Reserve System (cont’d) – Functions • Banking for the government • Banking

Controlling the Money Supply • Monetary Policy – The Fed manages the nation’s economic growth by managing money supply and interest rates • Tools of the Fed – Reserve requirements – Discount rate controls – Open market operations – Selective credit controls © 2009 Pearson Education, Inc.

The Changing Money and Banking System • Anti-Terrorism Regulations – Bank Secrecy Act (BSA)

The Impact of Electronic Technologies • Check 21 – Allows banks to present a substitute check for payment instead of the original check • Blink Credit Cards – A “contactless” payment system • Debit Cards – Allow the transfer of money between accounts – Used with point-of-sale (POS) terminals © 2009 Pearson Education, Inc.

The Impact of Electronic Technologies (cont’d) • Smart Cards – Credit-card-size plastic cards with an embedded computer chip that can be programmed with “electronic money” • E-Cash – Money that moves via digital transmissions on the Internet, outside the established network of banks, checks, and paper currency overseen by the Fed © 2009 Pearson Education, Inc.

International Banking and Finance • World Bank – Provides a limited scope of financial services • International Monetary Fund (IMF) – Promotes the stability of exchange rates – Provides temporary, short-term loans to member countries – Encourages members to cooperate on international monetary issues – Encourages development of a system for international payments © 2009 Pearson Education, Inc.

Key Terms automated teller machine (ATM) banker’s acceptance checking account (demand deposit) commercial bank credit union currency (cash) debit card discount rate e-cash electronic funds transfer (EFT) Federal Deposit Insurance Corporation (FDIC) Federal Reserve System (the Fed) finance company float individual retirement account (IRA) insurance company International Monetary Fund (IMF) letter of credit M 1 M 2 M 3 monetary policy © 2009 Pearson Education, Inc.

Key Terms (cont’d) money market mutual fund mutual savings bank open-market operations pension fund point-of-sale (POS) terminal prime rate reserve requirement revenue recognition revenues Sarbanes-Oxley Act of 2002 (Sarbox) savings and loan association (S&L) securities investment dealer (broker) selective credit controls © 2009 Pearson Education, Inc.