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Chap020
- 1. Chapter 20 Money, Financial Institutions, and the Federal Reserve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
- 2. Chapter Twenty LEARNING GOALS 1. Explain what money is and what makes money useful. 2. Describe how the Federal Reserve controls the money supply. 3. Trace the history of banking and the Federal Reserve System. 4. Classify the various institutions in the U.S. banking system. 20-2
- 3. Chapter Twenty LEARNING GOALS 5. Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises. 6. Describe how technology helps make banking more efficient. 7. Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund. 20-3
- 4. Profile BEN BERNANKE Federal Reserve • Bernanke is a former Princeton economics professor. • Former President George W. Bush appointed Bernanke Chairman of the • Almost every Federal Reserve in 2006. factor related to the economy is influenced by the decisions he makes. 20-4
- 5. Chapter Twenty NAME that COMPANY This bank-like store in Austin, Texas, was designed to serve low-income clients who don’t have traditional bank accounts. Customers pay a one-time $10 fee that allows them to cash checks and put the money onto debit cards. Name that company! 20-5
- 6. What is Money? WHAT’S MONEY? LG1 • Money -- Anything people generally accept as payment for goods and services. • Barter -- The direct trading of goods or services for other goods or services. 20-6
- 7. What is Money? STANDARDS for a LG1 USEFUL FORM of MONEY • Portability • Divisibility • Stability • Durability • Uniqueness 20-7
- 8. What is the Money Supply? The MONEY SUPPLY LG2 • Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: - M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.). - M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.). - M3 -- M2 + big deposits like institutional money market funds. 20-8
- 9. What is the Money Supply? NEW MONEY LG2 Paper Money Printed in 2010 (In $ Billions) Source: Bloomberg Businessweek, December 20, 2010. 20-9
- 10. What is the Money Supply? HOW LONG DOES LG2 PAPER MONEY LAST? Source: Federal Reserve, www.federalreserve.gov, accessed September 2011. 20-10
- 11. What is the Money Supply? MONEY MILESTONES LG2 20-11
- 12. What is the Money Supply? MONEY FACTS What You Might Not Know About What’s in Your Wallet LG2 • In 2009, the U.S. printed 26,000,000 bills a day! • Each penny costs 1.6¢ and each nickel costs 6¢ to make. • The most-tracked bill on WheresGeorge.com has travelled over 7,600 miles in 4 years! • 2/3 of all U.S. $100 bills are outside the U.S. • 90% of paper money has traces of cocaine! Source: Fast Company, February 2011. 20-12
- 13. The Global Exchange of Money EXCHANGING MONEY GLOBALLY LG2 • Falling dollar value: The amount of goods and services you can buy with a dollar decreases. • Rising dollar value: The amount of goods and services you can buy with a dollar increases. • What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies. 20-13
- 14. The Global Exchange of Money The IMPACT of a LG2 FALLING DOLLAR • Overseas demand for U.S. products rise. • A favorable exchange rate for U.S. companies increases profits in foreign markets. • U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers. 20-14
- 15. Basics About the Federal Reserve FIVE MAJOR PARTS of the LG2 FEDERAL RESERVE SYSTEM 1. The Board of Governors 2. The Federal Open Market Committee 3. 12 Federal Reserve Banks 4. 3 Advisory Councils 5. The member banks of the system 20-15
- 16. Basics About the Federal Reserve The 12 FEDERAL RESERVE LG2 DISTRICT BANKS 20-16
- 17. Basics About the Federal Reserve MANAGING the MONEY SUPPLY LG2 • The Fed uses three basic tools: 1. Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank. 2. Open-Market Operations -- The buying and selling of government bonds. 3. Discount Rate -- The interest rate the Fed charges for loans to member banks. 20-17
- 18. The Federal Reserve’s Check- Clearing Role CHECK-CLEARING PROCESS LG2 THROUGH the FEDERAL RESERVE 20-18
- 19. Progress Assessment PROGRESS ASSESSMENT • What is money? • What are the five characteristics of useful money? • What is the money supply, and why is it important? • How does the Federal Reserve control the money supply? • What are the major functions of the Federal Reserve? What other functions does it perform? 20-19
- 20. The History of Banking and the Need for the The ESTABLISHMENT of the Fed LG3 FEDERAL RESERVE SYSTEM • A cash shortage problem in 1907 led to the creation of the Federal Reserve System. • Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve. 20-20
- 21. The History of Banking and the Need for the Fed LARGEST BANK FAILURES LG3 Source: http://www.FDIC.gov, accessed July 2011. 20-21
- 22. The U.S. Banking System The U.S. BANKING SYSTEM LG4 • Commercial banks • Savings and loan associations • Credit unions • Nonbanks 20-22
- 23. Commercial Banks COMMERCIAL BANKS LG4 • Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans. • A commercial bank has two types of customers: 1. Depositors 2. Borrowers 20-23
- 24. Services Provided by Commercial COMMERICAL BANKS’ Banks LG4 SERVICES • Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor. • Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal. • Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date. 20-24
- 25. BANKING on SOCIAL MEDIA (Social Media in Business) • Banks are using the Internet and social media to communicate with Gen Y customers. • Today 29 million Bank of America customers use online banking. • 6.5 million customers use smartphones for mobile banking. • Banks are following other companies leads and embracing social media. 20-25
- 26. WHAT to TELL the TELLER (Making Ethical Decisions) • The bank teller mistakenly gives you $320 instead of the $300 you asked for. • You bring the error to her attention, but she disagrees she miscounted the money. • You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day. • What are your alternatives? What do you do? 20-26
- 27. Savings and Loan Associations SAVINGS and LG4 LOAN ASSOCIATIONS • Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans. • Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership. 20-27
- 28. Credit Unions CREDIT UNIONS LG4 • Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. • As nonprofits, credit unions enjoy an exemption from federal income taxes. 20-28
- 29. Other Financial Institutions NONBANKS LG4 • Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include: - Life insurance companies - Commercial finance companies - Pension funds - Corporate financial - Brokerage firms services 20-29
- 30. The RISE of the NONBANK (Spotlight on Small Business) • About ¼of American households don’t have a bank account. • Mango Store is a bank-like facility in Austin, Texas. Clients pay a one-time $10 fee that lets them cash as many checks as they want by putting the money onto debit cards. • Mango hopes its customers will increase their earning power and remain customers over time. 20-30
- 31. Other Financial WHAT ATTRACTS CUSTOMERS Institutions LG4 to ONLINE BANKING • Free identity theft protection • Free credit score monitoring • Personal financial management • Instant messaging service • Bank’s blog Source: comScore, www.comscore.com, accessed September 2010. 20-31
- 32. Progress Assessment PROGRESS ASSESSMENT • Why did the U.S. need a Federal Reserve Bank? • What is the difference between a bank, a savings and loan association, and a credit union? • What is a consumer finance company? 20-32
- 33. Protecting Your Funds PROTECTING LG5 DEPOSITORS’ MONEY • The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $250,000. • The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. • The National Credit Union Administration (NCUA) -- Provides up to $250,000 coverage per individual depositor per institution. 20-33
- 34. Using Technology to Make Banking More Efficient TECHNOLOGICAL LG6 ADVANCEMENTS in BANKING • Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically. • Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account. 20-34
- 35. Using Technology to Make Banking More Efficient SMART CARDS LG6 • Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more. 20-35
- 36. International Banking and MAKING TRANSACTIONS in Banking Services LG7 OTHER COUNTRIES • Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. • Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time. • Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros). 20-36
- 37. The World Bank and the International LEADING INSTITUTIONS in Monetary Fund LG7 INTERNATIONAL BANKING • World Bank -- Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life. • International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF. 20-37
- 38. NEW ISSUES FACING the WORLD BANK and the IMF (Reaching Beyond Our Borders) • A debt crisis in Europe; Japan trying to recover from its earthquake and tsunami; major disruptions in the Middle East; China and Brazil are having problems with high inflation; and rising food prices are happening all over the planet. • Poorer nations are having a particularly hard time because of the high food prices. • The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious. 20-38
- 39. Progress Assessment PROGRESS ASSESSMENT • What are some of the causes for the banking crisis beginning in 2008? • What is the role of the FDIC? • How does a debit card differ from a credit card? • What is the World Bank and what does it do? • What is the IMF and what does it do? 20-39
Notas del editor
- Companies: Mango
- See Learning Goal 1: Explain what money is and what makes money useful.
- See Learning Goal 1: Explain what money is and what makes money useful. The new $100 bill has features like a 3D ribbon, as well as ink with microscopic flakes that shift color.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. New Money This slide shows the value of different bills printed in 2010. In 2010 over 1 billion $1 bills, 2 billion $20 bills, and over 2 billion $100 bills were printed. Most of the value of U.S. currency is $100 bills. In 2010 the U.S. printed more bills in every category but $1s and $50s when compared to 2009.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. How Long Does Paper Money Last? This slide gives the students an idea of the life span of paper money in circulation. The largest denomination ever printed was a $100,000 gold certificate. Share with students some interesting facts regarding U.S. currency: - Originally, U.S. currency included denominations of $500, $1,000, $5,000, and $10,000. No currency printed today is greater than $100 dollars. - The percent of U.S. counterfeit currency in circulation is estimated to be .02%. - U.S. Currency bills are 2.61 inches wide, 6.14 inches long, thickness of .0043 inches and weighs 1 gram. - It costs 4.2 cents to produce a U.S. bill. - The Bureau of Engraving prints about 16,650,000 one dollar bills per day. (Source: enchantedlearning.com)
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. Money Milestones This slide illustrates some interesting dates regarding U.S. money Have students look through the dates. Which do they find most interesting or surprising and why? Ask students: How do some of the amounts listed compare to today?
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. Since the United States abandoned the gold standard, the U.S. dollar has depreciated by approximately 90 percent.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. The Impact of a Falling Dollar This slide highlights some of the issues related to a falling dollar. While these points are positive, the long term implications of a falling dollar are more serious. A declining dollar will eventually result in the following: Higher interest rates on government and consumer debt. Higher inflation due to a rise in the price of imports, and commodity prices increase since most are priced in terms of U.S. dollars.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. The Federal Reserve is a quasi-governmental agency not under the direct control of the U.S. government.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. This slide is based on Figure 20.1.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
- See Learning Goal 2: Describe how the Federal Reserve controls the money supply. See Figure 20.3 in text for further information.
- Money can be anything that people accept as payment for goods and services. The five characteristics of useful money are: Portability, divisibility, stability, durability, and uniqueness. The money supply is the amount of money available for people to buy goods and services. It is important to manage the money supply, since too much money could cause inflation and too little money may cause deflation. To control the money supply the Federal Reserve can increase or decrease the reserve requirement, buy or sell government securities, or change the discount rate. The Federal Reserve is responsible for creating an environment that fosters stable prices and full employment. It attempts to manage these two goals with monetary policy. The Federal Reserve is also responsible for the clearing of checks.
- See Learning Goal 3: Trace the history of banking and the Federal Reserve System. State banks were also permitted to join.
- See Learning Goal 3: Trace the history of banking and the Federal Reserve System. Largest Bank Failures This slide highlights the largest bank failures in U.S. banking history. Three of these failures are a direct result of the financial crisis that started in 2008. Ask students: Why didn ’t the Washington Mutual and IndyMac Bank failures create a total loss of confidence in the United States banking system like we saw during the Great Depression? ( Students should be able to recognize the stepped up role of the US government including the creation of the FDIC insurance program and the increase in FDIC coverage from $100,000 to $250,000.)
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system. Commercial banks also offer credit cards, financial counseling, automatic payment of bills, brokerage services, safe-deposit boxes, travelers checks, and individual retirement accounts (IRAs).
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system. Due to their exemption from federal income taxes, credit unions: fees are typically less and the interest rates paid on deposits are often higher.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system.
- See Learning Goal 4: Classify the various institutions in the U.S. banking system. What Attracts Customers to Online Banking This slide illustrates what attracts customers to online banking. Households have increased their use of online banking from approximately 8 million households to an estimated 51 million households in 2009. Leading the growth of online banking are California, Florida and Texas. Combined, these states made up more than 40 percent of the growth in online banking. Others in the top 10 for growth were Washington, Georgia, Arizona, North Carolina, Missouri, and Maryland. More than 71 percent of online banking customers report they are highly satisfied with their online banking experience. According to ComScore the adoption of online banking is rising at a rate of 13 percent each year. And by 2011, 76 million households will bank online compared with an estimated 51 million in 2009.
- The Federal Reserve emerged after the banking crisis of 1907 and was organized originally to be a lender of last resort. After bank deregulation, the services offered by banks and S&Ls are now similar. They both offer many of the same services. Credit Unions are tax-exempt member-owned cooperatives that operate like banks. Consumer finance companies offer short-term loans to those who cannot meet the credit requirements of regular banks.
- See Learning Goal 5: Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises. The amount of depositors ’ insurance was increased to $250,000 create confidence in the banking system.
- See Learning Goal 6: Describe how technology helps make banking more efficient.
- See Learning Goal 6: Describe how technology helps make banking more efficient.
- See Learning Goal 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
- See Learning Goal 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund. Both the World Bank and the IMF were created to rebuild the world economy after World War II.
- See Learning Goal 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
- After the internet bubble of the late 1990s, the Federal Reserve lowered interest rates creating a situation in which mortgage rates were low thus fueling a housing boom. Banks relaxed their underwriting standards and created mortgage-backed securities and sold them to organizations throughout the world. The government did not regulate these transactions well and banks collapsed as housing values fell and individuals defaulted on their loans. The role of the FDIC is to insure bank deposits if a bank were to fail. Bank deposits are currently insured up to $250,000. Unlike a credit card a debit card functions as a check, withdrawing funds directly from a checking account. The debit card only allows you to spend money that is in your account; once the balance is zero the card cannot be used. If the card is used with a zero balance, it will result in overdrafts. The World Bank, also called the International Bank for Reconstruction and Development, is responsible for financing economic development. The IMF was established to assist the smooth flow of money among nations. Nations must join the IMF and allow for flexible exchange rates, inform the IMF of changes in a country's monetary policy, and to modify policies on the advice of the IMF.