Fourth EditionFourth Edition
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PART 6 . . . . . . . . . . . . . . . . . . . . . . . .PART 6 . . . . . . . . . . . . . . . . . . . . . . . .Understanding Financial IssuesUnderstanding Financial Issues
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Chapter 14Chapter 14
Understanding Money and Banking
Understanding Money and Banking
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“A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins to rain.”
~ Mark Twain
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Key Topics
Money and its forms in the U.S.
U.S. financial institutions
How banks create money and how they are regulated
The Federal Reserve system
Changes in the financial industry
International banking and finance
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Portability
Divisibility
Durability
Stability
What Is Money?
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The Functions of Money
Medium of Exchange
Store of Value
Unit of Account
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The Cost of Producing U.S. Coins
Golden Dollar 10.03 cents
Half Dollar 9.93 cents
Quarter 4.29 cents
Dime 1.88 cents
Nickel 3.13 cents
Penny .81 cents
Source: http://www.usmint.gov/faqs/circulating_coinsSource: http://www.usmint.gov/faqs/circulating_coins
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Just How Much Is a Ton of Money Worth?
Dollar Bills $908,000
Quarters $40,000
Pennies $3,632
Source: State of Michigan Office of Financial and Insurance Services, Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money
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The Money Supply
M1: SpendableCurrency
Demand deposits
M2: Spendable plus Convertible
Time deposits
Money market mutual funds
Savings deposit
Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 14 - 14 - 101019641964 19691969 19741974 19841984 19841984 19891989 19941994 20012001
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Money Supply Growth
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Credit CardsA Major Financial Force
Credit cards accounted for almost half of all transactions for the year 2000
Credit cards are a large and growing business
Convenient for Convenient for usersusers
Convenient for Convenient for usersusers
Highly profitable Highly profitable for issuersfor issuers
Highly profitable Highly profitable for issuersfor issuers
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U.S. Financial Institutions
Commercial BanksCommercial Banks
Diversification and mergersDiversification and mergers
Commercial interest ratesCommercial interest rates
Savings and Loan AssociationsSavings and Loan Associations
Mutual Savings BanksMutual Savings Banks
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U.S. Financial Institutions
Credit UnionsCredit Unions
Non-Deposit InstitutionsNon-Deposit Institutions
Pension fundsPension funds
Insurance companiesInsurance companies
Finance companiesFinance companies
Securities investment dealersSecurities investment dealers
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Special Financial Services
Individual Retirement Accounts (IRAS)
Trust Services
International Services
Currency exchange
Letters of credit
Banker’s acceptance
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Special Financial Services
Financial advice and brokerage services
Automated teller machines
Electronic funds transfer
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Banks As Creators of Money
$100.00 $10.00 $90.00 $190.00
90.00 9.00 81.00 271.00
81.00 8.10 72.90 343.00
72.90 7.29 65.61 409.51
65.61 6.56 59.05 468.56
DepositMoney held in
Reserve by BankMoney to Lend
Total Supply
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The Federal Reserve System
StructureStructure
Board of governorsBoard of governors
Reserve banksReserve banks
Member banksMember banks
FunctionsFunctions
Banking for the Banking for the governmentgovernment
Banking for banksBanking for banks
Controlling the Controlling the money supplymoney supply
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Reserve requirements
Discount rate controls
Open market operations
Selective credit controls
Controlling the Money SupplyThe Tools of the Fed
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The Changing Money and Banking System
Interstate BankingDeregulationDeregulation
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Electronic Technologies A Dramatic Change
Debit CardsDebit CardsDebit CardsDebit Cards
Smart CardsSmart CardsSmart CardsSmart Cards
E-cashE-cashE-cashE-cash
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The International Payments ProcessOlive Exchange(Greece to U.S.)
Equipment Exchange(U.S. to Greece.)
U.S. Importer U.S. ExporterU.S. Bank
Greek Exporter Greek ImporterGreek Bank
1
23
4 5
6 7
8
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Bolstering International Trade
International Monetary Fund (IMF)International Monetary Fund (IMF)Stable exchange rates
Temporary short-term loans
Cooperation on global monetary issues
International payments system
World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services
World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services
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Chapter Review
Define money and its forms in the U.S.
Describe U.S. financial institutions
Explain how banks create money and how they are regulated
Discuss the functions and tools of the Federal Reserve system
Identify how the financial industry is changing
Understand international banking and finance