Chapter Fifteen Money and the Financial System

Chapter FifteenMoney andthe Financial SystemMoney in the Financial SystemFinanceThe study of money: how it’s made, how it’s lost, and why.MoneyAnything generally accepted in exchange for goods and services.The Functions of MoneyMedium of Exchange: Accepted as payment for products and resources.Measure of Value: Single standard for assigning and comparing values of products and resources.Store of Value: Means of retaining and accumulating wealth.The Characteristicsof MoneyAcceptabilityDivisibilityPortabilityStabilityDurabilityDifficulty to CounterfeitFacts About MoneyThe Life Expectancy of Paper Money:$1 1.5 years$5 2 years$10 3 years$20 4 years$50 9 years$100 9 yearsFAST FACT:There is about $525 billion of US currency in circulation, and about two-thirds is held outside of the US. Source: “Fedpoint 1: How Currency Gets Into Circulation,” Federal Reserve Bank of New York – Publications, September 18, 2001, p. 1-2.Types of MoneyNear MoneySavings accountMoney market accountCertificate of depositCredit cardDebit cardTraveler’s checkMoney orderCashier’s check Checking AccountsCheckNOW AccountA CheckClearingnumberBank numberRegionalbank numberThis gets put on when thecheck clears. It represents the dollar amount, in this case,$250.00.ChecknumberAccountnumberClearingnumberBanknumberCheck sum (a numberused to verify that everythingis correct)Facts About ChecksAbout 13 million US households do not have checking accounts.180 million checks are cashed annually in 3,700 check-cashing stores for a value of $55 billion.85% of checks cashed are payroll checks and the average check is about $300.Source: Calmetta Coleman, “Altering Course, Banks WelcomeCheck Cashers,” Wall Street Journal, July 6, 2001, p. B1.Facts About Credit CardsMasterCard and Visa are the 2 major credit cards.American Express is the dominant Travel &Entertainment credit cardAmericans hold over $675 billion in credit card debt. Source: Emily Thornton, Heather Timmons, and Joseph Weber, “Who Holds the Cards?,” Business Week, March 19, 2001, p. 90.Facts About Debit CardsA debit card looks like a credit card but works like a check.A debit card gives a direct, immediate electronic payment to a merchant from the cardholder’s checking account.They lack credit, offer no “grace period,” and provide no paper trail of transactions.The American Financial SystemThe Federal Reserve SystemBanking InstitutionsThe Federal Reserve System©The Functions of theFederal Reserve BoardTo control the money supply with monetary policyTo regulate financial institutionsTo manage regional and national check-clearing proceduresTo supervise the federal deposit insurance of commercial banks in the Federal Reserve systemThe Federal Reserve’s Monetary Policies1. Open Market Operations2. Reserve Requirements3. Discount Rate4. Credit ControlsFed Tools for Regulatingthe Money SupplyBuy government securities The money supply increases; economic activity increases.Sell government securities The money supply decreases; economic activity slows down.Raise discount rate Interest rates increase; the money supply decreases; economic activity slows down.Lower discount rate Interest rates decrease; the money supply increases; economic activity increases.ActivityEffect on the Money Supplyand the EconomyFed Tools for Regulatingthe Money SupplyIncrease reserve requirements Banks make fewer loans; the money supply declines; economic activity slows down.Decrease reserve requirements Banks make more loans; the money supply increases; economic activity increases.ActivityEffect on the Money Supplyand the EconomyFed Tools for Regulatingthe Money SupplyRelax credit controls More people are encouraged to make major purchases, increasing economic activity.Restrict credit controls People are discouraged from making major purchases, decreasing economic activity.ActivityEffect on the Money Supplyand the EconomyThe Check Clearing ProcessThe Austin Bank adds $120.00to Acme’s bank account. Suzy smith receives the canceled checkfrom her bank in Chicago at theend of the monthThe Chicago Federal Reserve Bankelectronically transmits $120.00 tothe Dallas Federal Reserve Bank, which credits the Austin bank’s account for $120.00.Ms. Smith’s bank authorizes theChicago Federal Reserve Bank todeduct $120.00 from its account.The Austin bank deposits the checkin its account at the FederalReserve Bank in Dallas.The Federal Reserve Bank in Dallaselectronically transmits the check tothe Federal Reserve Bank of Chicago.The Federal Reserve Bank of Chicago forwards the check to Ms. Smith’s bank in Chicago, whichdeducts the $120.00 from heraccount.Suzy Smith a student from Chicago,writes a check to Acme UniversityBooks in Austin, TX, for $120.00 forher textbooks. Acme deposits hercheck in its account in Austin, TX, bank.Day 1Day 2Day 3Banking InstitutionsCommon Banking Institutions:Commercial BanksSavings and Loan AssociationsCredit UnionsMutual Savings BanksNon-Banking InstitutionsTypical Non-Banking Institutions:Insurance CompaniesPension FundsMutual FundsMoney Market FundsBrokerage FirmsNon-Financial FirmsFinance CompaniesElectronic BankingATMETFACHsHome BankingATM FactsThe top 5 ATM owners are Bank of America, Wells Fargo, E-Trade Bank, American Express, and Bank One.The average ATM withdrawal is $60.ATM customers spend 20-25% more than non-ATM customers.60% of Americans ages 25-34 use ATMs 8 times a month.The most popular day for ATM usage is Friday.Source: “ATM Fact Sheet,” Press Room: ATMfacts 2001, September 18,2001.Changes in Commercial BankingMergersNow offer insurance, brokerage & investment banking servicesLarge banks have offices in more statesInternet bankingGlobalization of bankingForeign ownership of domestic banks – “Megabanks”Solve the Dilemma1. List the various types of U.S. financial institutions and the primary functions of each.2. What services of each financial institution is Hill’s new company likely to need?3. Which single financial institution is likely to best meet Hill’s small company’s needs now?Explore Your Career OptionsIn what industries are economists likely to be asked to provide economic projections?Additional Discussion Questions and Exercises1. Look at Figure 15.2 in your textbook and determine in which of the 12 Federal Reserve Districts you are located. What is the nearest Federal Reserve bank city or Federal Reserve branch city?2. What is meant by a demand deposit?3. Why have credit cards become a popular substitute for money?4. What are the advantages of automated teller machines (ATMs) for customers? For banks?Chapter 15 Quiz1. Most paper currency is lightweight; the weight of money ` applies to which characteristic of money? a. durability b. stability c. divisibility d. portability2. The percentage of deposits that a banking institution must hold in reserve, either in the bank itself or in a Federal Reserve Bank, and not loan to businesses or individuals is the a. discount rate. b. reserve requirement. c. M1. d. depository insurance.Chapter 15 Quiz3. The largest of all banking institutions in the United States are a. savings and loan associations. b. commercial banks. c. credit unions. d. mutual savings banks.4. The failure of the savings and loan associations and the problems in some commercial banks were caused primarily by a. high government taxes on banking institutions. b. bad real estate loans. c. failure of students to repay college loans. d. electronic funds transfer.Multiple Choice Questions about the Video1. The difference between a secured bond and a debenture is that a. a secured bond has specific assets pledged against the money borrowed while a debenture does not. b. a secured bond has fixed assets pledged against the money borrowed while a debenture has short-term assets pledged against the money borrowed. c. a secured bond is a high risk debt security while a debenture is a low risk debt security. d. a secured bond is always secured by land while a debenture is always secured by equipment. Multiple Choice Questions about the Video2. Which of the following statements best describes the tax treatment for interest and dividend payments? a. Interest is paid after taxes. b. Interest is a tax-deductible expense. c. Dividends are a tax-deductible expense. d. All are correct.