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Chapter Menu
Chapter Introduction
Section 1: What Is Money?
Section 2: The Federal Reserve System
Section 3: How Banks Operate
Visual Summary
Chapter Intro 1
Our market economy is based on the idea of voluntary exchange—we exchange money for the goods and services we need. You live in a world where this exchange usually involves money. It is the primary medium of exchange for goods and services.
Chapter Intro 2
Section 1: What Is Money?
The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service. People are willing to accept money in exchange for goods, and financial institutions give people both a safe place to deposit their money or take out loans.
Chapter Intro 2
Section 2: The Federal Reserve System
Political and economic institutions evolve to help individuals and groups accomplish their goals. The central bank of the United States is the Federal Reserve System. It controls the money supply, serves as the government’s bank, and watches over the banking industry.
Chapter Intro 2
Section 3: How Banks Operate
Political and economic institutions evolve to help individuals and groups accomplish their goals. Banks offer important financial services to millions of people.
Section 1-Main Idea
Guide to Reading
Big Idea
The basis of the market economy is voluntary exchange. In the American economy, the exchange usually involves money in return for a good or service.
Section 1-Key Terms
Guide to Reading
Content Vocabulary
• coin
• currency
• commercial bank
• savings and loan association (S&L)
• credit union
Academic Vocabulary
• obvious • medium
Section 1-Polling Question
Do you trust the stability of our financial system?
A. Yes
B. No
A. A
B. B
A B
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Section 1
Money
People are willing to accept money in exchange for goods.
Section 1
Money (cont.)
• Money serves different functions and comes in different forms.
• Functions:
– Medium of exchange
– Store of value
– Measure of value
Section 1
• Types:
– Historically—salt, hides, gems, tobacco
– Coins
– Currency
Money (cont.)
• Confidence in money gives value
Features of U.S. Currency
A. A
B. B
C. C
D. D
Section 1
A B C D
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Which do you think would make a good form of money?
A. Gold chains
B. Baseball cards
C. Seashells
D. Paperclips
Section 1
The Financial System
Financial institutions give people a safe place to deposit their money or take out loans.
Section 1
The Financial System (cont.)
• Types of financial institutions:
– Commercial banks
– Savings and loan associations (S & L)
– Credit unions
– All perform similar functions
Section 1
• Regulation and insurance make the U.S. financial system one of the safest.
The Financial System (cont.)
Section 1
• Federal Deposit Insurance Corporation (FDIC)
– Formed because of Great Depression
– Protects individual accounts up to $100,000
The Financial System (cont.)
• Consumer confidence in banks fuels economic growth
A. A
B. B
Section 1
Do you agree that commercial banks do better at managing consumers’ money than do non-profit credit unions?
A. Agree
B. Disagree
A B
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Section 2-Main Idea
Guide to Reading
Big Idea
Political and economic institutions evolve to help individuals and groups accomplish their goals.
Section 2-Key Terms
Guide to Reading
Content Vocabulary
• central bank
• Federal Open Market Committee (FOMC)
• monetary policy
• discount rate
• reserve
• open market operations
Section 2-Key Terms
Guide to Reading
Academic Vocabulary
• manipulate • contract
A. A
B. B
Section 2-Polling Question
Should the United States consolidate independent banks into one national bank?
A. Yes
B. No
A B
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Section 2
Structure and Organization
The central bank of the United States is the Federal Reserve System.
Section 2
Structure and Organization (cont.)
• The Federal Reserve System, or Fed, is the central bank of the U.S.
– Established in 1913
– Divided into 12 Federal Reserve Districts
The Federal Reserve System
Section 2
• Thousands of member banks in the Fed
– Member banks are owners
– Buy stock and earn dividends in the Fed
Structure and Organization (cont.)
The Federal Reserve System
Section 2
• Economic decisions made by Board of Governors
– President appoints, Senate ratifies seven members
– One member chairs for four years
– Free of political pressure
Structure and Organization (cont.)
The Federal Reserve System
Section 2
• Different advisory councils report on:
– Condition of economy by district
– Financial institutions
– Consumer loans
Structure and Organization (cont.)
The Federal Reserve System
Section 2
• Federal Open Market Committee (FOMC) manipulates money supply
Structure and Organization (cont.)
The Federal Reserve System
A. A
B. B
Section 2
A B
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Do you agree that the Fed is necessary to the U.S. economy?
A. Agree
B. Disagree
Section 2
Functions of the Fed
The Fed controls the money supply, serves as the government’s bank, and watches over the banking industry.
Section 2
Functions of the Fed (cont.)
• The Fed:
– Regulates banks
– Controls the money supply
– Holds the government’s money
Section 2
• Two main regulatory functions:
– Banking regulation
– Consumer credit
Functions of the Fed (cont.)
Section 2
• Government’s bank
– Holds government’s money
– Sells bonds and Treasury bills
– Issues currency
Functions of the Fed (cont.)
Section 2
• Sets monetary policy by controlling money supply and interest
– Raises interest rate by contracting money supply
– Lowers interest rate by expanding money supply
Functions of the Fed (cont.)
Monetary Policy and Interest Rates
Section 2
• Fed tools:
– Discount rate—lower rate stimulates economy
– Raise and lower reserve requirements for member banks
– Open market operations—buying bonds stimulates economy
Functions of the Fed (cont.)
Monetary Policy and Interest Rates
Section 2
• The Fed is effective because it can move quickly and fine-tune as needed.
– Buying and selling bonds
– Changes in interest rates
Functions of the Fed (cont.)
Monetary Policy and Interest Rates
A. A
B. B
C. C
D. D
Section 2
A B C D
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The Fed can best stimulate the economy by
A. buying bonds.
B. expanding the money supply.
C. lowering the discount rate.
D. All of the above
Section 3-Main Idea
Guide to Reading
Big Idea
Political and economic institutions evolve to help individuals and groups accomplish their goals.
Section 3-Key Terms
Guide to Reading
Content Vocabulary
• checking account
• savings account
• certificate of deposit (CD)
Academic Vocabulary
• initial
• principal
• behalf
Section 3-Polling Question
Would starting a bank be a good investment for someone with a lot of money?
A. Yes
B. No A. A
B. B
A B
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Section 3
Banking Services
Banks offer important financial services for millions of people.
Section 3
Banking Services (cont.)
• Investors start banks
– Need depositors for banks to grow
– Interest from loans generates profits
Section 3
• Deposits
– Checking accounts—no interest or low interest
– Savings accounts—higher interest for higher deposits
– Certificates of deposit—set time period, higher interest
– Banks make loans using deposits
Banking Services (cont.)
A. A
B. B
C. C
D. D
Section 3
A B C D
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If you were saving money for college, which would be the best investment?
A. Checking account
B. Savings account
C. Certificate of deposit
D. Money under the mattress
Section 3
Changes in Banking
Throughout American history, banking has become safer and more efficient.
Section 3
Changes in Banking (cont.)
• U.S. banking has become safer and more efficient with time.
• The National Bank chartered in 1791
– Supplied federal government
– Many opposed it
– Went out of business when charter lapsed
Section 3
• Privately owned state banks issued currency until 1863.
– National Banking Act
– National currency
– Federally chartered private banks
Changes in Banking (cont.)
Section 3
• Panic of 1907
– Federal Reserve Act of 1913 passed
Changes in Banking (cont.)
Section 3
• Great Depression
– 1930s
– F. D. Roosevelt closed all banks
– Only financially sound could reopen
– Federal Deposit Insurance Corporation (FDIC) established
Changes in Banking (cont.)
Section 3
• The Savings and Loan Crisis
– Late 1980s and early 1990s
– High-risk loans
– Hundreds of S&Ls failed
– FDIC took over regulations of S&Ls
Changes in Banking (cont.)
Section 3
• The Gramm-Leach-Bliley Act
– Passed in 1999
– Banking institutions can offer more services
Changes in Banking (cont.)
A. A
B. B
Section 3
A B
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Do you agree that there could be a financial disaster like the Panic of 1907 today?
A. Agree
B. Disagree
Figure 1
Figure 2A
Figure 2B
Figure 3
TIME Trans
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
coin
metallic form of money such as pennies, nickels, and dimes
Vocab2
currency
both coins and paper money
Vocab3
commercial bank
a financial institution that offers full banking services to individuals and businesses
Vocab4
savings and loan association (S&L)
financial institutions that traditionally loaned money to people buying homes
Vocab5
credit union
nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services
Vocab6
obvious
easily found, seen, or understood
Vocab7
medium
a means of doing
Vocab8
central bank
an institution that lends money to other banks; also, the place where the government does its banking business
Vocab9
Federal Open Market Committee (FOMC)
the most powerful committee of the Fed, because it makes the decisions that affect the economy as a whole by manipulating the money supply
Vocab10
monetary policy
policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit
Vocab11
discount rate
interest rate the Fed charges on its loans
Vocab12
reserve
a certain percentage of deposits that banks have to set aside as cash in their own vaults or as deposits in their Federal Reserve district bank
Vocab13
open market operations
purchase or sale of U.S. government bonds and Treasury bills
Vocab14
manipulate
to handle with skill
Vocab15
contract
to become smaller
Vocab16
checking account
an account in which deposited money can be withdrawn at any time by writing a check
Vocab17
savings account
an account in which customers receive interest based on how much money they have deposited
Vocab18
certificate of deposit (CD)
timed deposit that states the amount of the deposit, maturity, and rate of interest being paid
Vocab19
initial
the very first
Vocab20
principal
the most important
Vocab21
behalf
in the interest of
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