Download CHAPTER 24

CHAPTER 24.1: WHAT IS MONEY?
1. Money serves three functions:
a) It serves as a medium of exchange. (We can trade it for goods/services)
b) Serves as a store of value. (It can be held until its ready to be spent)
c) Serves as a measuring stick. (It allows us to figure out how much something is
worth)
2. There are two TYPES of money: coins and currency.
3. Money has value because we are absolutely sure someone else will ACCEPT it.
4. THE FINANCIAL SYSTEM
There are three types of financial institutions in our system:
a) COMMERCIAL BANKS: these offer full-service banking services. These by far
make up the majority of our financial system, therefore they are the most
important.
b) SAVINGS AND LOANS: these are institutions that specialize in loaning money
and issuing savings accounts. Nowadays, they offer the same services as
commercial banks.
c) CREDIT UNIONS: these operate on a non-profit basis. Normally they are only
open to a certain group of people who sponsor it. (Example: NC State Employees
Credit Union is only open to people who work for the state – and their family
members.)
5. WHY OUR FINANCIAL SYSTEM IS SAFE
Our banking system is safe for two reasons:
a) It is heavily REGULATED.
b) It is insured by the Federal Deposit Insurance Corporation (FDIC). As of
2008, it insures up to $250,000 per bank account. (Previously it was $100,000).
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24.1 REVIEW
1.
2.
3.
4.
5.
What are the three functions of money?
What are two types of money?
Why does our money have value?
What are the three types of financial institutions?
Why is our financial system safe?
CHAPTER 24.2: THE FEDERAL RESERVE SYSTEM
6. The central (most important) bank in the USA is the Federal Reserve – aka the
FED. It is considered the "bank for banks." Whenever the banks need to borrow
money, they borrow from the Fed. The nation is divided up into 12 districts, each
possessing its own “District Bank.”
7. The major policy-making group within the Fed is the Federal Open Market
Committee (FOMC). They control the economy by manipulating (adjusting) the
money supply.
8. FUNCTIONS OF THE FED
A) The Fed is the regulator of commercial banks in our nation. They enforce
banking laws and have to approve any mergers between banks.
B) They serve as the government's bank. It holds the government’s money and
manages its money.
9. MONETARY POLICY
This deals with controlling the money supply and the “cost” of borrowing money
(interest rate).
 If the Fed wants to LOWER the interest rate, it will INCREASE the money supply.
(More supply, price of money drops!)
 If the Fed wants to RAISE the interest rate, it will DECREASE the money supply.
(Less supply, price of money goes up!)
10. The Fed can control the supply of money by adjusting the discount rate, which
is the rate the Fed charges banks to borrow money.
 If the Fed wants to increase the amount of money in circulation, they will lower
the discount rate, which encourages banks to borrow money to make loans to
people – which stimulates the economy. (Lower discount rate = cheaper cost for
bank to borrow from FED)
 If the Fed wants to decrease the amount of money in circulation, they will raise
the discount rate, which discourages banks to borrow money – which slows
down or constricts the economy.
11. The Fed can also alter the reserve requirement, which is the amount of
money banks have to leave on reserve with the Fed. If it raises the reserve
requirement, it leaves banks with less money to loan. If it lowers it, banks have
more money to loan out.
12. Lastly, the Fed can sell treasury bills. Selling them takes money out of the
economy. Buying them from investors puts more money in the economy.
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24.2 REVIEW
1.
2.
3.
4.
What is the Fed?
What are the two functions of the Fed?
What is the major policy-making group within the Fed?
What are the ways the Fed can strengthen the economy (You will need to read
and apply the information)?
5. What are the ways the Fed can slow down the economy?
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CHAPTER 24.3 HOW BANKS OPERATE
13.
BANKING SERVICES
14.
LOANING MONEY
 CHECKING ACCOUNTS: these are accounts for which people set up to pay bills
and small expenses. Money usually does not stay in these accounts long.
 SAVINGS ACCOUNTS: these are accounts set up for saving money. They tend
to have interest rates, which pay the depositor money over time depending on
how much money they have in the account.
 CD's: Also known as “certificates of deposit.” We covered this awhile back, so
you should know what it is. If not, go read about it in Chapter 20.
The banking services listed above are designed to bring in money so the bank
can perform its primary, profitable, function: LOANING MONEY. People get
loans for a variety of reasons, from cars, houses, or personal reasons. This is
vital for keeping money in circulation and flowing through the economy.
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HISTORY OF BANKING
15. Until 1863 (not counting the failed Second Bank of the USA in 1816), money was
printed by state governments. The NATIONAL BANKING ACT changed this to
where federal banks did the job of printing money.
16.
In 1913, the FEDERAL RESERVE was created.
17. The Great Depression led to a major overhaul (change) of the banking system.
Franklin Roosevelt led over many changes, the significant being the establishment
of the FDIC.
18. In the late 1970’s the Savings and Loans banks made many risky loans (similar
to what the commercial banks have did recently – remember the “bailouts?”) and
were unable to collect on them – which nearly led to a collapse. The FDIC had to
intervene and bail out the savings and loans banks – which led them to take over as
the primary regulator of the S&L industry.
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24.3 REVIEW
1.
2.
3.
4.
5.
When was the Fed created?
Why do banks offer checking, savings, and sales of CD’s?
How do banks make money?
What development in the banking industry did the Great Depression lead to?
What did the National Banking Act do?