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Unit 7
Evaluate the investment decisions made by
individuals, businesses, and the
government. Describe the role of money in
trading, borrowing, and investing
I: Function of Money
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A: Money: coin and paper currency
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1. medium of exchange = using money to purchase goods
and services
2. unit of measure=using money to compare prices of
goods and services
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Comparing price tags or prices in advertisement
3. store of value=money will keep its value if it is stored.
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A. your money can make money through earning interest by
saving it.
B. your money can lose value through inflation= rise in prices.
II: The Banking System
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A: Financial Institutions: banks, savings and loan
associations, credit unions, etc.
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1. All three institutions collect money from households,
keeping it safe as deposits, and investing the money by
loaning it to individuals or firms.
Banks accept demand deposits and time deposits.
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Demand deposits or checking accounts earn little interests but
their funds are available immediately upon the depositor's demands.
Time deposits or certificates of deposit (CDs) require the depositor
to leave the money at the bank for a specified time during which
the money earns interest.
Banking
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C. Federal Deposit Insurance Corporation( FDIC) insures to $250,000
all accounts in federally chartered banks. Established in the 1930’s as a
result of the Great Depression.
National Banking Act: In 1863 Congress passed the act federally chartering
private banks who then issued national banknotes uniform in appearance.
Before the Civil War, each state had their own bank and own currency.
Savings and Loan Crisis: In the 1970’s Congress began to ease regulation
of banking activities. Savings and Loans began to make higher-risk loans
and activities. Some S&L’s failed in the 1980’s and 1990’s and the Federal
Reserve intervened, took over and regulated them like banks, and insured
deposits.
Gramm-Leach-Bliley Act: Allowed commercial banks to offer full range of
financial services, banking, insurance, and securities.
2010: Dodd-Frank Bill passes Congress because of the housing loan, and
banking investment difficulties of 2008 and 2009, thus imposing heavy
regulation of banks and their lending practices.
III: Monetary Policy
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A: Federal Reserve: Nation’s Bank
12 Federal Reserve Banks- regulate the money supply
by doing 3 things:
1: Reserve Requirement: amount of money the
government requires banks to have on hand to repay
depositors.


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.1. affects the money supply (the point of monetary policy)
2. if the Federal Reserve Bank wants to reduce the money supply –
tight money– it will raise reserve requirements.
3. if it wants to increase money supply and have easy money, it will
reduce the reserve requirement.
B: Government manages its taxation and spending with fiscal policy.
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C. Federal Reserve manages the economy
through Monetary Policy
D: To tighten money supply: stop recession
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FED will raise the discount rate
Sell Treasury securities-taking money out of
economy
E: To loosen money supply: stimulate
economy:
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FED lowers discount rate
Buys Treasury securities adding money to
economy
Let’s Recap
Contractionary:Tighten
policy
 Raise Discount rate

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Sell Securities on the Open
Market
Raise the Reserve
Requirement
Goal: Take money out of
supply
Expansionary:Loosen policy
 Lower Discount Rate

Buy Securities

Lower Reserve Requirement

Goal: Stimulate economyput more money available
in economy
IV: Investing
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A: Households can invest in insurance against
future problems
B: Types of Insurance
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1. Medical insurance pays for health care
2. Liability Insurance covers damage done to
another person, for example, while driving or to
another person’s property
3.Comprehensive insurance covers damage to a
vehicle from vandalism, theft, or natural disaster
V: Other types of Savings and
Investment Accounts
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Roth IRA: periodic deposits , earns variable interest rate, can
be tax deductible. Can’t withdraw without penalty.
401K: Retirement accts. through employer, earns variable
interest rate. Can’t draw except at retirement or specific needs.
Education IRA: non-deductible acct. that has tax free
withdrawals for child’s college education.
Stocks: Shares of ownership in companies that pay dividends.
Mutual Funds: pooled money invested, interest is earned.
Money Market Accounts: High interest on large deposits, may
withdraw any time.
Homework: Due Wednesday
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Copy the Life of a Check into your notes on a
separate sheet of paper.
Copy the Visual Summary graphic organizers
into your notes
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What is money?
What is the Federal Reserve?
What do banks do?