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Fourth Edition

BUSINESS ESSENTIALS Fourth Edition PART 6 . . . . . . . . . . . . . . . . . . . . . . . . Understanding Financial Issues Ronald J. Ebert & Ricky W. Griffin Copyright ©2003 Prentice Hall, Inc. Chapter 14 Understanding Money and Banking

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Fourth Edition

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  1. BUSINESS ESSENTIALS Fourth Edition PART 6 . . . . . . . . . . . . . . . . . . . . . . . . Understanding Financial Issues Ronald J. Ebert & Ricky W. Griffin Copyright ©2003 Prentice Hall, Inc.

  2. Chapter 14 Understanding Money and Banking

  3. “A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins to rain.”~ Mark Twain

  4. Key Topics • Money and its forms in the U.S. • U.S. financial institutions • How banks create money and how they are regulated • The Federal Reserve system • Changes in the financial industry • International banking and finance

  5. What Is Money? • Portability • Divisibility • Durability • Stability

  6. The Functions of Money Medium of Exchange Store of Value Unit of Account

  7. The Cost of Producing U.S. Coins Golden Dollar 10.03 cents Half Dollar 9.93 cents Quarter 4.29 cents Dime 1.88 cents Nickel 3.13 cents Penny .81 cents Source: http://www.usmint.gov/faqs/circulating_coins

  8. Just How Much Is a Ton of Money Worth? Dollar Bills $908,000 Quarters $40,000 Pennies $3,632 Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money

  9. The Money Supply • M1: Spendable • Currency • Demand deposits • M2: Spendable plus Convertible • Time deposits • Money market mutual funds • Savings deposit

  10. 5.4 5.0 4.4 4.0 3.4 3.0 Money Supply (trillions) 2.4 2.0 1.4 1.0 0.4 0 1964 1969 1974 1984 1984 1989 1994 2001 Money Supply Growth M-2 M-1

  11. Credit CardsA Major Financial Force • Credit cards accounted for almost half of all transactions for the year 2000 • Credit cards are a large and growing business Convenient for users Highly profitable for issuers

  12. U.S. Financial Institutions • Commercial Banks • Diversification and mergers • Commercial interest rates • Savings and Loan Associations • Mutual Savings Banks

  13. U.S. Financial Institutions • Credit Unions • Non-Deposit Institutions • Pension funds • Insurance companies • Finance companies • Securities investment dealers

  14. Special Financial Services • Individual Retirement Accounts (IRAS) • Trust Services • International Services • Currency exchange • Letters of credit • Banker’s acceptance

  15. Special Financial Services • Financial advice and brokerage services • Automated teller machines • Electronic funds transfer

  16. $100.00 $10.00 $90.00 $190.00 90.00 9.00 81.00 271.00 81.00 8.10 72.90 343.00 72.90 7.29 65.61 409.51 65.61 6.56 59.05 468.56 Money held in Reserve by Bank Money to Lend Total Supply Deposit Banks As Creators of Money

  17. Structure Board of governors Reserve banks Member banks Functions Banking for the government Banking for banks Controlling the money supply The Federal Reserve System

  18. Controlling the Money SupplyThe Tools of the Fed • Reserve requirements • Discount rate controls • Open market operations • Selective credit controls

  19. The Changing Money and Banking System Deregulation Interstate Banking

  20. Electronic TechnologiesA Dramatic Change Debit Cards Smart Cards E-cash

  21. The International Payments Process Olive Exchange (Greece to U.S.) Equipment Exchange (U.S. to Greece.) 1 8 U.S. Importer U.S. Bank U.S. Exporter 2 6 7 3 4 5 Greek Exporter Greek Bank Greek Importer

  22. Bolstering International Trade International Monetary Fund (IMF) • Stable exchange rates • Temporary short-term loans • Cooperation on global monetary issues • International payments system • World Bank • Provides a limited scope of financial services

  23. Chapter Review • Define money and its forms in the U.S. • Describe U.S. financial institutions • Explain how banks create money and how they are regulated • Discuss the functions and tools of the Federal Reserve system • Identify how the financial industry is changing • Understand international banking and finance

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