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Chapter Introduction
Section 1: What Is Money?
Section 2: The Federal
Reserve System
Section 3: How Banks
Operate
Visual Summary
Our market economy is
based on the idea of
voluntary exchange—we
exchange money for the
goods and services we need.
You live in a world where this
exchange usually involves
money. It is the primary
medium of exchange for
goods and services.
Section 1:
What Is Money?
The basis of the market economy
is voluntary exchange. In the
American economy, the exchange
usually involves money in return
for a good or service. People are
willing to accept money in exchange
for goods, and financial institutions
give people both a safe place to
deposit their money or take out
loans.
Section 2:
The Federal Reserve
System
Political and economic
institutions evolve to help
individuals and groups
accomplish their goals. The
central bank of the United States is
the Federal Reserve System. It
controls the money supply, serves
as the government’s bank, and
watches over the banking industry.
Section 3:
How Banks Operate
Political and economic
institutions evolve to help
individuals and groups
accomplish their goals.
Banks offer important
financial services to millions
of people.
Guide to Reading
Big Idea
The basis of the market economy is
voluntary exchange. In the American
economy, the exchange usually
involves money in return for a good
or service.
Guide to Reading
Content Vocabulary
• coin
• currency
• commercial
bank
• savings and
loan association
(S&L)
• credit union
Academic Vocabulary
• obvious
• medium
Do you trust the stability of our
financial system?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
Money
People are willing to accept money in
exchange for goods.
Money (cont.)
• Money serves different functions and
comes in different forms.
• Functions:
– Medium of exchange
– Store of value
– Measure of value
Money (cont.)
• Types:
– Historically—salt, hides, gems, tobacco
– Coins
– Currency
• Confidence in money gives value
Features of U.S. Currency
Which do you think would make a
good form of money?
A. Gold chains
B. Baseball cards
C. Seashells
D. Paperclips
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
The Financial System
Financial institutions give people a safe
place to deposit their money or take
out loans.
The Financial System (cont.)
• Types of financial institutions:
– Commercial banks
– Savings and loan associations (S & L)
– Credit unions
– All perform similar functions
The Financial System (cont.)
• Regulation and insurance make the U.S.
financial system one of the safest.
The Financial System (cont.)
• Federal Deposit Insurance
Corporation (FDIC)
– Formed because of Great Depression
– Protects individual accounts up to
$100,000
• Consumer confidence in banks fuels
economic growth
Do you agree that
commercial banks do
better at managing
consumers’ money than
do non-profit credit
unions?
0%
0%
B
B. Disagree
A
A. Agree
A. A
B. B
Guide to Reading
Big Idea
Political and economic institutions
evolve to help individuals and groups
accomplish their goals.
Guide to Reading
Content Vocabulary
• central bank
• discount rate
• Federal Open
Market
Committee
(FOMC)
• reserve
• open market
operations
• monetary policy
Academic Vocabulary
• manipulate
• contract
Should the United States consolidate
independent banks into one national
bank?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Structure and Organization
The central bank of the United States is
the Federal Reserve System.
Structure and Organization (cont.)
• The Federal Reserve System, or Fed, is
the central bank of the U.S.
– Established in 1913
– Divided into 12 Federal Reserve Districts
The Federal Reserve System
Structure and Organization (cont.)
• Thousands of member banks in the Fed
– Member banks are owners
– Buy stock and earn dividends in the Fed
The Federal Reserve System
Structure and Organization (cont.)
• Economic decisions made by Board of
Governors
– President appoints, Senate ratifies
seven members
– One member chairs for four years
– Free of political pressure
The Federal Reserve System
Structure and Organization (cont.)
• Different advisory councils report on:
– Condition of economy by district
– Financial institutions
– Consumer loans
The Federal Reserve System
Structure and Organization (cont.)
• Federal Open Market Committee
(FOMC) manipulates money supply
The Federal Reserve System
Do you agree that the Fed is
necessary to the U.S. economy?
A. Agree
B. Disagree
A. A
B. B
0%
A
0%
B
Functions of the Fed
The Fed controls the money supply,
serves as the government’s bank, and
watches over the banking industry.
Functions of the Fed (cont.)
• The Fed:
– Regulates banks
– Controls the money supply
– Holds the government’s money
Functions of the Fed (cont.)
• Two main regulatory functions:
– Banking regulation
– Consumer credit
Functions of the Fed (cont.)
• Government’s bank
– Holds government’s money
– Sells bonds and Treasury bills
– Issues currency
Functions of the Fed (cont.)
• Sets monetary policy by controlling
money supply and interest
– Raises interest rate by contracting
money supply
– Lowers interest rate by expanding
money supply
Monetary Policy and Interest Rates
Functions of the Fed (cont.)
• Fed tools:
– Discount rate—lower rate stimulates
economy
– Raise and lower reserve requirements
for member banks
– Open market operations—buying
bonds stimulates economy
Monetary Policy and Interest Rates
Functions of the Fed (cont.)
• The Fed is effective because it can move
quickly and fine-tune as needed.
– Buying and selling bonds
– Changes in interest rates
Monetary Policy and Interest Rates
The Fed can best stimulate the
economy by
A. buying bonds.
B. expanding the money
supply.
C. lowering the discount
rate.
0%
D. All of the above
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Guide to Reading
Big Idea
Political and economic institutions
evolve to help individuals and groups
accomplish their goals.
Guide to Reading
Content Vocabulary
• checking
account
• certificate of
deposit (CD)
• savings
account
Academic Vocabulary
• initial
• principal
• behalf
Would starting a bank be a good
investment for someone with a lot
of money?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
Banking Services
Banks offer important financial
services for millions of people.
Banking Services (cont.)
• Investors start banks
– Need depositors for banks to grow
– Interest from loans generates profits
Banking Services (cont.)
• Deposits
– Checking accounts—no interest or low
interest
– Savings accounts—higher interest for
higher deposits
– Certificates of deposit—set time
period, higher interest
– Banks make loans using deposits
If you were saving money for college,
which would be the best investment?
A. Checking account
B. Savings account
C. Certificate of deposit
D. Money under the mattress
A. A
B. B
C
0%C. 0%
D. D
A
B
0%
C
0%
D
Changes in Banking
Throughout American history, banking
has become safer and more efficient.
Changes in Banking (cont.)
• U.S. banking has become safer and more
efficient with time.
• The National Bank chartered in 1791
– Supplied federal government
– Many opposed it
– Went out of business when charter
lapsed
Changes in Banking (cont.)
• Privately owned state banks issued
currency until 1863.
– National Banking Act
– National currency
– Federally chartered private banks
Changes in Banking (cont.)
• Panic of 1907
– Federal Reserve Act of 1913 passed
Changes in Banking (cont.)
• Great Depression
– 1930s
– F. D. Roosevelt closed all banks
– Only financially sound could reopen
– Federal Deposit Insurance Corporation
(FDIC) established
Changes in Banking (cont.)
• The Savings and Loan Crisis
– Late 1980s and early 1990s
– High-risk loans
– Hundreds of S&Ls failed
– FDIC took over regulations of S&Ls
Changes in Banking (cont.)
• The Gramm-Leach-Bliley Act
– Passed in 1999
– Banking institutions can offer more
services
Do you agree that there could be a
financial disaster like the Panic of
1907 today?
A. Agree
B. Disagree
A. A
B. B
0%
A
0%
B
coin
metallic form of money such as
pennies, nickels, and dimes
currency
both coins and paper money
commercial bank
a financial institution that offers full
banking services to individuals and
businesses
savings and loan association
(S&L)
financial institutions that traditionally
loaned money to people buying
homes
credit union
nonprofit service cooperative that
accepts deposits, makes loans, and
provides other financial services
obvious
easily found, seen, or understood
medium
a means of doing
central bank
an institution that lends money to
other banks; also, the place where
the government does its banking
business
Federal Open Market
Committee (FOMC)
the most powerful committee of the
Fed, because it makes the decisions
that affect the economy as a whole by
manipulating the money supply
monetary policy
policy that involves changing the rate
of growth of the money supply in
circulation in order to affect the cost
and availability of credit
discount rate
interest rate the Fed charges on its
loans
reserve
a certain percentage of deposits that
banks have to set aside as cash in
their own vaults or as deposits in their
Federal Reserve district bank
open market operations
purchase or sale of U.S. government
bonds and Treasury bills
manipulate
to handle with skill
contract
to become smaller
checking account
an account in which deposited money
can be withdrawn at any time by
writing a check
savings account
an account in which customers
receive interest based on how much
money they have deposited
certificate of deposit (CD)
timed deposit that states the amount
of the deposit, maturity, and rate of
interest being paid
initial
the very first
principal
the most important
behalf
in the interest of
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