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Chapter 12Money and Financial Institutions
Business Principles Fall 2009
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Something to Think About…
• Think about how bartering, or trading goods and services, might work in your life.
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Essential Questions
• What are some ways you currently use a bank?
• How might your dealings with a bank expand or change in the future?
• Why do you think it is important to use a bank?
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Objectives
• Describe the functions and characteristics of money.
• Discuss three main functions of a bank.
• Compare and contrast three types of banks that are found in our economy.
• Explain the major functions of the Federal Reserve System in the U.S. Economy.
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The Purpose of Money
• Money allows people and businesses to buy and sell goods around the world.
• Money is a standard of value and a means of exchange or payment.
• It can be anything people will accept as a payment.
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The Purpose of Money
• Today we use coins, currency, checks, and debits cards.
• This is our monetary system.
• Goods and services are directly exchanged using money.
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Functions of Money
• You want to go buy your favorite product, but you don’t have any money to buy it.
• What would you have to do in order to get that favorite product?
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Functions of Money
• Money has three basic functions:– Medium of exchange: anything generally
accepted as a measure of value and of wealth
– Standard of Value: a way to measure the weight, amount, size, or value of something
– Store of Value: it holds its value over time and can be stored or saved
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Characteristics of Money
• Must be stable in value
• Must be scarce
• Must be accepted
• Should be divisible into parts
• Has to be portable and durable
• Must be hard to counterfeit
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The Functions of Banks
• Financial Institution is a firm that manages money.
• Banks are the main type of financial institution
• They offer a variety of financial services
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Storing Money
• Storing money means to place or leave it for preservation or later use.
• Bank account is used to keep a record of the amount of money that has been deposited or withdrawn from a bank
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Bank Accounts
• Checking Account– Short term storage– Banks charge a fee
• Saving Account– Long term storage– It earns more interest
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Transferring Money
• Banks use checks and electronic funds transfers to move money.
• Checks transfer money from one party to another
• EFT allows money to transfer from one bank to another through a network– Direct Deposit
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Lending Money
• The money you deposit in a bank make it possible for the bank to lend to other customers
• Customers must pay interest on the money they borrow from banks
• Most banks require some form of collateral
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Types of Loans
• Mortgage Loan– Used to buy real estate
• Commercial Loan– Made to businesses
• Individual Loan– Made to individuals
• Line of Credit– Lend money to be used at any time
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Other Financial Services
• Many banks provide advice on managing and investing money.
• You can also store valuable items, jewelry and birth certificates, in a safe-deposit box.
• Banks offer debit and credit cards
• They also have a trust department that manages money
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Exit Ticket
• What is a major advantage of using money over bartering in buying goods and services?
• What are the characteristics that money must have?
• What are the four types of loans that a bank makes?
• Why do you think it is important to use a bank?
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Financial Institutions
• Banks operate on state, national, and international levels
• There are strict rules to start a bank
• The owner must apply for a charter from the government
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Financial Institutions
• The three main types of banks are:
– Commercial banks– Savings and loan associations– Credit unions
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Commercial Banks
• These makeup the majority of banks in the United States.
• Offer wide range of banking services, checking, savings, loans, and financial advice
• Called full-service banks
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Commercial Banks
• Serve individual and businesses
• They charge more interest on money they lend than the money they pay on savings accounts to earn a PROFIT.
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Savings and Loan Associations
• Financial institutions that hold customers’ funds in interest-bearing accounts and invest mainly in mortgage loans
• Originally, their purpose was to encourage people to save money and make it easier to buy a home
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Savings and Loan Associations
• In the 1980s, about 20% of savings and loan associations failed
• New regulations were passed allowing them to charge higher interest rates and offer more services.
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Credit Unions
• Not-for-profit banks set up by organizations for their customers to use.
• Credit unions offer credit cards, checking accounts, low-interest loans, and high interest savings accounts
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Other Financial Institutions• Mortgage Companies
– Provide loans for buying a home or business
• Finance Companies– Short-term loans to businesses and consumers
• Insurance Companies– Provide protection against problems and also offer loans to
businesses
• Brokerage Firms– Sell stock and bonds and also offer a wide range of financial
services.
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The Federal Reserve System
• Central Bank of the United States
• It is the banker’s bank
• They monitor the money supply
• There are 12 Federal Reserve Districts, 25 Branch Banks, and 5,000 member banks
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The Federal Reserve System
• It’s mission is to:– Provide the United States with a safe, flexible,
and stable monetary and financial system
• Run by a board of directors
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The Federal Reserve System
• It has six functions:– Clearing Checks– Acting as the Federal Government’s Fiscal
Agent– Supervising Member Banks– Regulating the Money Supply– Setting Reserve Requirements– Supplying Paper Currency
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Assignment
• Name the headquarters of the 12 Federal Reserve district banks across the United States
• Find an example of each in the United States:
• Commercial Bank, Savings and Loan Association, Credit Union, Mortgage Companies, Finance Companies, Insurance Companies, and Brokerage Firms