Transcript Chapter 19
Chapter Nineteen Understanding Money, Banking, and Credit What Is Money? • Barter System - first exchanges – stuff for stuff • Money – Anything used to obtain products that has little value except in reuse to obtain products The Functions of Money • Medium of exchange – Anything accepted as payment • Measure of value – A “yardstick” used to assign values and compare values of products & services • Store of value – A means of retaining and accumulating wealth • Careful - inflation causes a loss of stored value so saved money has to gain interest to maintain its value Important Characteristics of Money • Divisible • Portable • Difficult to counterfeit • Durable So, how much money does a country have? Three main measures of a supply of money – M1 only 15% • Currency, demand deposits, and travelers checks – M2 • M1 plus short term bonds, time deposits ( & CD’s less than $100,000 – M3 • M1 and M2 plus time deposits of $100,000 or more • Demand deposit – An amount on deposit in a checking account • Time deposit – Money deposited in an interest-bearing savings account The Supply of Money 55% 15% 15% So, who creates and controls all this money? The Federal Reserve • The central bank of the U.S. - the bank for banks Has 12 district banks and 25 branch banks The Federal Reserve Main function -regulate nation’s money supply How? 1) controlling bank reserves requirements 2) regulating the discount rate 3) running open-market operations The Federal Reserve System 1) Regulation of reserve requirements – Reserve requirement—% of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank – More required reserves = less money in circulation – Less required reserves = more money in circulation to stimulate the economy The Federal Reserve System 2) Regulation of the discount rate – Discount rate—the interest rate the Fed charges for loans to its member banks – Lower loan rates allow banks to lend more and stimulate the economy – Higher rates slow the economy and check inflation The Federal Reserve System 3) Open-market operations – The buying & selling of U.S. government securities by the Fed – To reduce the money supply, the Fed sells government securities on the open market to take money out of circulation – To increase the money supply, the Fed buys government securities Other Federal Reserve Responsibilities – Serving as the U.S. government bank – Clearing checks and electronic transfers of funds between banks – Inspection and replacement of worn and unfit currency – Two mints – 1) Denver 2) Philadelphia One printer – D.C. Traditional Services Provided by Financial Institutions • Checking accounts-money on demand • Savings accounts– statement savings account - short time deposit – Certificate of deposit (CD)-bank pays depositor a guaranteed interest rate for money left on deposit for a specified period of time Traditional Services Provided by Financial Institutions • Short- and long-term loans – Line of credit—a short-term loan that is approved before the money is actually needed – Revolving credit agreement—a guaranteed line of short term credit approved when you need it (credit cards) – Collateral—real estate or property pledged as security for a loan Traditional Services Provided by Financial Institutions • Credit card and debit card transactions – Banks pay the merchant for your purchases, but deduct a fee for their service. – Banks then bill you for the full price of the merchandise, imposing monthly finance charges on your unpaid balance – Debit card—electronic subtraction of a purchase from the cardholder’s account at time of purchase. No finance charge to user. If I Leave It, Will It Be There Later? • Federal Deposit Insurance Corporation (FDIC) – created in 1933 – restored public confidence in banking industry – insures deposits against bank failures – provides deposit insurance of $100,000 per account