MONEY & BANKING

Mr. Roseman

MONEY Functions of Money:

a medium of exchange able to trade it for goods/services

a store of valuea measure of value

Types of Money:anything people are willing to accept in exchange

for goods

Currency = 1. coins 2. paper money

WHAT GIVES MONEY ITS

VALUE?!WE HAVE FAITH IN IT!

FORMS OF CURRENCY

BANKING banks bring savers (sellers) & borrowers

(buyers) togethersavers = depositsborrowers = loans

banks are businesses have profit motive!How do banks make profit?

banking fees & interest on loans

WHAT BANKS DO 1. ACCEPT DEPOSITS 2. MAKE LOANS 1. ACCEPT DEPOSITS use deposits to make loans!

checking accounts: pay bills/transfer $ no interest earned short-term

savings accounts interest earned savings grows w/time long-term

certificates of deposit (CDs) customer loans $ to the bank for certain amount of time

ex. 1 year CD deposit of $1000 at 4% interest. earns higher interest rate penalty for early withdrawal

WHAT BANKS DO (CONT.) 2. MAKE LOANS

loan an agreement for borrowing money with repayment

plus interest banks make profit from interest paid on loan

loan terminology: “the principle” = the amount borrowed “interest” = the cost of borrowing “interest rate” = the rate of cost to borrow “fixed rate loan” = interest rate on loan cannot

change “variable rate loan” = interest rate on loan

changes

Banks can increase the money supply by making loans. fractional reserve banking (aka “making money

out of this air!”) Let’s see how this works! YAY!

TYPES OF BANKS

1. Commercial Banks

2. Savings & Loan Associations

3. Credit Unions

A BRIEF HISTORY OF BANKS

Bank of the United States, 1791 & 1816 went out of business state & private banks were left with great freedom

Federal Reserve, 1913 “Panic of 1907” prompted its creation

Great Depression banks bankrupt lost customers’ savings banks now heavily regulated as a result FDIC (Federal Deposit Insurance Corporation) established,

1933 gov’t corporation insures individual accounts in banks up to $100,000

depositor’s savings safe if bank fails

Savings & Loan Crisis, 1980s

CHARGE ACCOUNTS & CREDIT

charge account: buy goods/services at individual businesses, but pay later credit limit: the maximum amount that you can buy with the

promise of later payment

3 kinds of charge accounts 1. installment account

repaid w/equal payments over certain period ex. car loan

2. regular account billing cycle where bill is sent at the end interest charged if balance not paid

ex. furniture store

3. revolving account billing cycle where bill is sent at the end interest charged on portion not paid account can still be used until credit limit reached

ex. credit card

CREDIT (CONT.) credit cards: make purchases without cash

Receive an automatic loan Charge high interest loans (usually 18% to 24%) Lower interest rate if customer “reliable” credit cards are NOT debit cards!

How do I apply for credit? Must be 18 Fill out application credit bureau does a credit check

Credit check shows your income, debt, & ability to pay past debts

Rating of risk: Excellent, Good, Average, PoorRating has number associated with itGives lenders an idea of your reliability

Higher credit score = less interest you’re charged HOW DO YOU ESTABLISH GOOD CREDIT?!