Understanding Moneyand Financial Institutions

Understanding Moneyand Financial Institutions

Chapter 15

I. Money - anything that is acceptable as payment for goods and services.

A. Characteristics of Money 1. Scarcity 2. Durability US paper money does wear out; 95% of the new

money printed in 1990 was to replace ‘unfit notes’

& 5% was for economic growth (Source: Federal Reserve Bank San Francisco, www.frbsf.org)

3. Portability 4. Divisibility

B. Functions of Money

1. medium of exchange - enables individuals to exchange without having to barter

2. standard of value - permits unlike items to be purchased on a similar basis

3. store of value - enables individuals to hold onto the value of items after they are sold

C. The U.S. Money Supply

1. Currency - coins, paper money

2. Demand deposits - money kept in checking accounts that can be withdrawn by depositors on demand

3. Time deposits - deposits at a bank/fin inst that pay interest but cannot be withdrawn on demand.

II. The Federal Reserve System

A. Carrying out monetary policy 1. open market operations

2. reserve requirement 3. discount rate

B. Setting rules on credit 1. consumer credit rules 2. margin requirements

C. Distributing Currency 1. $150 billion in cash typically exists at the

Federal Reserve & at banks

2. Anticipating a high demand for cash prior to

Y2K, the Federal Reserve printed an extra extra

$70 billion$70 billion (the extra money was distributed to banks, this was enough for every US citizen, including children, to have $255)

D. Making Check Clearing Easier

Federal Monetary Tools

Money Interest Economic Action supply rates activity

buy bonds sell bonds

raise reserve lower reserve

raise discountrate lower discountrate

III. The US Financial System

A. Depository financial institutions 1. commercial banks - profit-oriented fin institution

2. thrift institutions - institution formed specifically to encourage household saving and to make home mortgage loans

3. credit unions - not-for-profit, member-owned financial cooperative

B. Nondepository financial institutions - do not provide banking services

1. insurance companies - major suppliers of funds

2. pension funds - managed by employers or unions

3. brokerage firms - buys and sells securities for its clients and provides advice

4. finance companies - make short-term loans, require borrowers to put up tangible assets as security

IV. Insuring Bank Deposits

A. Federal Deposit Insurance Corporation (FDIC)

1. Role of the FDIC - insures deposits up to $100,000 per account, backed by the credit of the US government

2. All banks in the Federal Reserve must have insurance 3. Enforcement by the FDIC - sets guidelines and reviews financial records & mgmt practices each year