Unit 6 finance academic FSAEU6


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Unit 6 finance academic FSAEU6

  1. 1. Unit 6 – Finance I. Currency
  2. 2. A. Money <ul><li>Three Uses of Money </li></ul><ul><li>Medium of exchange (Barter) - Exchanging goods & services without use of set values. </li></ul><ul><li>Unit of Account. </li></ul><ul><li>Store of Value. </li></ul><ul><li>2. Currency. </li></ul>
  3. 3. B. Six Characteristics of Money <ul><li>Durability – withstands wear & tear. </li></ul><ul><li>Portability – Easily transported from place to place. </li></ul><ul><li>Divisibility – Easily divided into smaller denominations. </li></ul><ul><li>Uniformity – Every unit must be the same for counting & measuring. </li></ul><ul><li>Limited Supply – The lower amount available, the value is more. </li></ul><ul><li>Acceptability – Everyone must be willing to accept the goods. </li></ul>
  4. 4. C. Sources of Money’s Value <ul><li>Commodity Money. </li></ul><ul><li>Representative Money. </li></ul><ul><li>Fiat Money. </li></ul>
  5. 5. D. Bank <ul><li>Early Republic </li></ul><ul><li>Federalists: Alexander Hamilton supported a centralized gov’t & national bank. </li></ul><ul><ul><li>Single currency for the entire nation </li></ul></ul><ul><ul><li>Manages government’s funds </li></ul></ul><ul><ul><li>Monitors other banks. </li></ul></ul><ul><li>Anti-federalists: Thomas Jefferson wanted a decentralized system. </li></ul>
  6. 6. E. First Bank of the United States <ul><li>1791 – Bank given 20 year charter </li></ul><ul><li>Great success in bringing order to banking </li></ul><ul><li>Anti-federalists argued it was unconstitutional & let charter run out in 1811. </li></ul>
  7. 7. F. Chaos Ensues <ul><li>States issued notes without backing. </li></ul><ul><li>Chartered many banks without credibility. </li></ul><ul><li>Prices rose, different types of currency produced. </li></ul>
  8. 8. G. Jacksonian Era <ul><li>Second Bank of the United States </li></ul><ul><li>1816 – 20 year charter </li></ul><ul><li>Jackson opposed centralized government & opposed re-chartering of the bank. </li></ul>
  9. 9. H. Free Banking <ul><li>Bank runs </li></ul><ul><li>Wildcat Banks – established on the frontier & were unreliable. </li></ul><ul><li>Fraud – Banks issued notes, collected gold & silver, then vanished. </li></ul><ul><li>Currency – Different states, cities, banks, businesses, & other organizations issued currency-creating chaos. </li></ul>
  10. 10. I. Civil War & Reconstruction <ul><li>North attempted stability. </li></ul><ul><ul><li>Greenbacks – national currency </li></ul></ul><ul><ul><li>Nation Banking Acts of 1864 & 1865 </li></ul></ul><ul><ul><li>Power to charter banks. </li></ul></ul><ul><ul><li>Power to require banks to hold gold & silver to back notes </li></ul></ul><ul><li>South issued its own currency based on cotton, but became worthless. </li></ul>
  11. 11. J. Gold Standard . <ul><li>Definite value for the dollar. </li></ul><ul><li>Government issued currency only if it had gold to back it. </li></ul>
  12. 12. K. Progressive Era <ul><li>Bank chaos </li></ul><ul><li>Centralized system for currency, but not banking. </li></ul><ul><li>Panic of 1907 – Banks did not have enough reserves to back up $, banks failed, businesses stopped expanding. </li></ul>
  13. 13. L. Federal Reserve System <ul><li>Central Bank. </li></ul><ul><li>Member Banks. </li></ul><ul><li>Federal Reserve Board – Appointed by President of the USA to supervise banks. </li></ul><ul><li>Loans – Fed banks loaned money for short term needs to prevent bank failures. </li></ul><ul><li>Federal Reserve Notes. </li></ul>
  14. 14. THE MEANING OF MONEY <ul><li>Money is the set of assets in an economy that people regularly use to buy goods and services from other people. </li></ul>
  15. 15. The Functions of Money <ul><li>Money has three functions in the economy: </li></ul><ul><ul><li>Medium of exchange </li></ul></ul><ul><ul><li>Unit of account </li></ul></ul><ul><ul><li>Store of value </li></ul></ul>
  16. 16. The Functions of Money <ul><li>Medium of Exchange </li></ul><ul><ul><li>A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. </li></ul></ul><ul><ul><li>A medium of exchange is anything that is readily acceptable as payment. </li></ul></ul>
  17. 17. The Functions of Money <ul><li>Unit of Account </li></ul><ul><ul><li>A unit of account is the yardstick people use to post prices and record debts. </li></ul></ul><ul><li>Store of Value </li></ul><ul><ul><li>A store of value is an item that people can use to transfer purchasing power from the present to the future. </li></ul></ul>
  18. 18. The Functions of Money <ul><li>Liquidity </li></ul><ul><ul><li>Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange. </li></ul></ul>
  19. 19. The Kinds of Money <ul><li>Commodity money takes the form of a commodity with intrinsic value. </li></ul><ul><ul><li>Examples: Gold, silver, cigarettes. </li></ul></ul><ul><li>Fiat money is used as money because of government decree. </li></ul><ul><ul><li>It does not have intrinsic value. </li></ul></ul><ul><ul><li>Examples: Coins, currency, check deposits. </li></ul></ul>
  20. 20. Money in the U.S. Economy <ul><li>Currency is the paper bills and coins in the hands of the public. </li></ul><ul><li>Demand deposits are balances in bank accounts that depositors can access on demand by writing a check. </li></ul>
  21. 21. THE FEDERAL RESERVE SYSTEM <ul><li>The Federal Reserve (Fed) serves as the nation’s central bank. </li></ul><ul><ul><li>It is designed to oversee the banking system. </li></ul></ul><ul><ul><li>It regulates the quantity of money in the economy. </li></ul></ul>
  22. 22. THE FEDERAL RESERVE SYSTEM <ul><li>The Fed was created in 1914 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system. </li></ul>
  23. 23. THE FEDERAL RESERVE SYSTEM <ul><li>The Structure of the Federal Reserve System: </li></ul><ul><ul><li>The primary elements in the Federal Reserve System are: </li></ul></ul><ul><ul><ul><li>1) The Board of Governors </li></ul></ul></ul><ul><ul><ul><li>2) The Regional Federal Reserve Banks </li></ul></ul></ul><ul><ul><ul><li>3) The Federal Open Market Committee </li></ul></ul></ul>
  24. 24. The Fed’s Organization <ul><li>The Fed is run by a Board of Governors, which has seven members appointed by the president and confirmed by the Senate. </li></ul><ul><li>Among the seven members, the most important is the chairman. </li></ul><ul><ul><li>The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees. </li></ul></ul>
  25. 25. The Fed’s Organization <ul><li>The Board of Governors </li></ul><ul><ul><li>Seven members </li></ul></ul><ul><ul><li>Appointed by the president </li></ul></ul><ul><ul><li>Confirmed by the Senate </li></ul></ul><ul><ul><li>Serve staggered 14-year terms so that one comes vacant every two years. </li></ul></ul><ul><ul><li>President appoints a member as chairman to serve a four-year term. </li></ul></ul>
  26. 26. The Fed’s Organization <ul><li>The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve Banks. </li></ul>
  27. 27. The Fed’s Organization <ul><li>The Federal Reserve Banks </li></ul><ul><ul><li>Twelve district banks </li></ul></ul><ul><ul><li>Nine directors </li></ul></ul><ul><ul><ul><li>Three appointed by the Board of Governors. </li></ul></ul></ul><ul><ul><ul><li>Six are elected by the commercial banks in the district. </li></ul></ul></ul><ul><ul><li>The directors appoint the district president, which is approved by the Board of Governors. </li></ul></ul>
  28. 28. The Federal Reserve System Copyright©2003 Southwestern/Thomson Learning
  29. 29. The Fed’s Organization <ul><li>The Federal Reserve Banks </li></ul><ul><ul><li>The New York Fed implements some of the Fed’s most important policy decisions. </li></ul></ul>
  30. 30. The Fed’s Organization <ul><li>The Federal Open Market Committee (FOMC) </li></ul><ul><ul><li>Serves as the main policy-making organ of the Federal Reserve System. </li></ul></ul><ul><ul><li>Meets approximately every six weeks to review the economy. </li></ul></ul>
  31. 31. The Fed’s Organization <ul><li>Monetary policy is conducted by the Federal Open Market Committee. </li></ul><ul><ul><li>Monetary policy is the setting of the money supply by policymakers in the central bank </li></ul></ul><ul><ul><li>The money supply refers to the quantity of money available in the economy. </li></ul></ul>
  32. 32. The Federal Open Market Committee <ul><li>Three Primary Functions of the Fed </li></ul><ul><ul><li>Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. </li></ul></ul><ul><ul><li>Acts as a banker’s bank, making loans to banks and as a lender of last resort. </li></ul></ul><ul><ul><li>Conducts monetary policy by controlling the money supply. </li></ul></ul>
  33. 33. The Federal Open Market Committee <ul><li>Open-Market Operations </li></ul><ul><ul><li>The money supply is the quantity of money available in the economy. </li></ul></ul><ul><ul><li>The primary way in which the Fed changes the money supply is through open-market operations . </li></ul></ul><ul><ul><ul><li>The Fed purchases and sells U.S. government bonds. </li></ul></ul></ul>
  34. 34. The Federal Open Market Committee <ul><li>Open-Market Operations </li></ul><ul><ul><li>To increase the money supply, the Fed buys government bonds from the public. </li></ul></ul><ul><ul><li>To decrease the money supply, the Fed sells government bonds to the public. </li></ul></ul>
  35. 35. BANKS AND THE MONEY SUPPLY <ul><li>Banks can influence the quantity of demand deposits in the economy and the money supply. </li></ul>
  36. 36. BANKS AND THE MONEY SUPPLY <ul><li>Reserves are deposits that banks have received but have not loaned out. </li></ul><ul><li>In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest. </li></ul>
  37. 37. BANKS AND THE MONEY SUPPLY <ul><li>Reserve Ratio </li></ul><ul><ul><li>The reserve ratio is the fraction of deposits that banks hold as reserves. </li></ul></ul>
  38. 38. Money Creation with Fractional-Reserve Banking <ul><ul><li>When a bank makes a loan from its reserves, the money supply increases. </li></ul></ul><ul><ul><li>The money supply is affected by the amount deposited in banks and the amount that banks loan. </li></ul></ul><ul><ul><ul><li>Deposits into a bank are recorded as both assets and liabilities. </li></ul></ul></ul><ul><ul><ul><li>The fraction of total deposits that a bank has to keep as reserves is called the reserve ratio. </li></ul></ul></ul><ul><ul><ul><li>Loans become an asset to the bank. </li></ul></ul></ul>
  39. 39. Money Creation with Fractional-Reserve Banking <ul><li>When one bank loans money, that money is generally deposited into another bank. </li></ul><ul><li>This creates more deposits and more reserves to be lent out. </li></ul><ul><li>When a bank makes a loan from its reserves, the money supply increases. </li></ul>
  40. 40. The Money Multiplier <ul><li>How much money is eventually created in this economy? </li></ul>
  41. 41. The Money Multiplier <ul><li>The money multiplier is the amount of money the banking system generates with each dollar of reserves. </li></ul>
  42. 42. The Fed’s Tools of Monetary Control <ul><li>The Fed has three tools in its monetary toolbox: </li></ul><ul><ul><li>Open-market operations </li></ul></ul><ul><ul><li>Changing the reserve requirement </li></ul></ul><ul><ul><li>Changing the discount rate </li></ul></ul>
  43. 43. The Fed’s Tools of Monetary Control <ul><li>Open-Market Operations </li></ul><ul><ul><li>The Fed conducts open-market operations when it buys government bonds from or sells government bonds to the public: </li></ul></ul><ul><ul><ul><li>When the Fed buys government bonds, the money supply increases. </li></ul></ul></ul><ul><ul><ul><li>The money supply decreases when the Fed sells government bonds. </li></ul></ul></ul>
  44. 44. The Fed’s Tools of Monetary Control <ul><li>Reserve Requirements </li></ul><ul><ul><li>The Fed also influences the money supply with reserve requirements . </li></ul></ul><ul><ul><li>Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits. </li></ul></ul>
  45. 45. The Fed’s Tools of Monetary Control <ul><li>Changing the Reserve Requirement </li></ul><ul><ul><li>The reserve requirement is the amount (%) of a bank’s total reserves that may not be loaned out. </li></ul></ul><ul><ul><ul><li>Increasing the reserve requirement decreases the money supply. </li></ul></ul></ul><ul><ul><ul><li>Decreasing the reserve requirement increases the money supply. </li></ul></ul></ul>
  46. 46. The Fed’s Tools of Monetary Control <ul><li>Changing the Discount Rate </li></ul><ul><ul><li>The discount rate is the interest rate the Fed charges banks for loans. </li></ul></ul><ul><ul><ul><li>Increasing the discount rate decreases the money supply. </li></ul></ul></ul><ul><ul><ul><li>Decreasing the discount rate increases the money supply. </li></ul></ul></ul>
  47. 47. Problems in Controlling the Money Supply <ul><li>The Fed’s control of the money supply is not precise. </li></ul><ul><li>The Fed must wrestle with two problems that arise due to fractional-reserve banking. </li></ul><ul><ul><li>The Fed does not control the amount of money that households choose to hold as deposits in banks. </li></ul></ul><ul><ul><li>The Fed does not control the amount of money that bankers choose to lend. </li></ul></ul>
  48. 48. M. Great Depression <ul><li>Economic decline starts 1929. </li></ul><ul><li>Banks loaned large sums of $ in the 20’s that businesses could not pay back. </li></ul><ul><li>Crop failures & dropping prices mean farmers unable to pay debts. </li></ul><ul><li>Stock market crash -1929 created panics in market & banks across nation. </li></ul><ul><li>FDR established bank holiday so banks would close & give time for people to calm down & the industry to regain footing. </li></ul><ul><li>FDIC established. </li></ul>
  49. 49. N. Deregulation and the Reagan Era <ul><li>Deregulation was sought by banks & was given by Republicans and Democrats. </li></ul><ul><li>Several industries were deregulated. </li></ul><ul><li>Savings & Loans also deregulated although they had been closely watched since Great Depression. </li></ul>
  50. 50. O. Conflicting Progress <ul><li>Congress passed legislation to restrict S&L’s. </li></ul><ul><li>Glass-Steagall Act passed that allows banks to sell stocks and bonds. </li></ul><ul><li>Bank mergers became extremely popular. </li></ul><ul><li>From the evidence you have seen in this set of notes and the reading, should the government be involved in the banking industry? Why or why not? </li></ul>
  51. 51. II. Modern Banking <ul><li>A. Money Supply – all $ USA. </li></ul><ul><li>M1 </li></ul><ul><li>Liquidity - money that people can gain access to easily and immediately </li></ul><ul><li>(Traveler’s checks) </li></ul><ul><li>M2 = assets that cannot be used as cash within a short period of time. (Deposits in savings accounts). </li></ul>
  52. 52. B. Managing Money <ul><li>Storing – fireproof vaults and protected by the FDIC </li></ul><ul><li>Saving accounts </li></ul><ul><li>Checking accounts </li></ul><ul><li>Money market accounts- Save and write a limited number of checks. Interest is high, but variable. </li></ul><ul><li>Certificates of Deposit – Guaranteed rate of interest over a period of time, in which you are not allowed to withdrawal unless you pay a fee. </li></ul>
  53. 53. C. Loans <ul><li>– banks let borrowers take money, as longs as they pay it back with interest. </li></ul><ul><li>Mortgages. </li></ul><ul><li>Credit Cards. </li></ul><ul><li>Simple and Compound Interest </li></ul><ul><li>Simple interest – $ made off of original borrowed sum. </li></ul><ul><li>Compound interest – $ made of original sum and previous interest. </li></ul><ul><li>Profit- banks make more $ off interest from $ they loaned out than the interest they pay to accounts. </li></ul>
  54. 54. D. Financial Institutions <ul><li>Commercial Banks – usually for businesses, play largest role in economy. 1/3 belong to Fed and are national banks. </li></ul><ul><li>Savings and Loans- Members deposited money into a general fund and borrowed money to buy homes. </li></ul><ul><li>Savings Banks- banking available to individuals. Depositors owned shares of banks. </li></ul><ul><li>Credit Unions- Organized for specific groups of people, with low interest rates, and loans for automobiles and homes. </li></ul><ul><li>Finance Companies – Provide installment loans for large purchases. People are more likely to fail paying these back and so interest rates are high. </li></ul>
  55. 55. III. Investments <ul><li>Financial System </li></ul><ul><ul><li>Flow of Savings – from savers to financial institutions to investors. </li></ul></ul><ul><ul><li>Intermediaries </li></ul></ul><ul><ul><ul><li>Bank </li></ul></ul></ul><ul><ul><ul><li>Life Insurance Companies – provides financial protection for families. Company collects premiums from customers and lends to investors. </li></ul></ul></ul><ul><ul><ul><li>Pension Funds – receives income after working a certain number of years or reaching a certain age. Pension funds invest money in stock, bonds, or other assets. </li></ul></ul></ul>
  56. 56. B. Financial Assets <ul><li>1. Bonds </li></ul><ul><ul><ul><li>Coupon Rate. </li></ul></ul></ul><ul><ul><ul><li>Maturity. </li></ul></ul></ul><ul><ul><ul><li>Par Value (face value or principal). </li></ul></ul></ul><ul><ul><ul><li>Yield. </li></ul></ul></ul><ul><ul><ul><li>Discounts – occur when bonds are sold at less than par value. </li></ul></ul></ul><ul><ul><ul><li>Ratings – Similar to academic grading. Two firms provide grade for bonds. Standard and Poor’s and Moody’s bond rates go from AAA/Aaa to D. </li></ul></ul></ul>
  57. 57. 2. Stock Market <ul><li>Stock or equities are shares of ownership in a corporation. </li></ul><ul><li>Dividends – payments to stockholders from the profits of a corporation. Usually paid four times a year. </li></ul>
  58. 58. C. Stock Exchange – Markets for buying and selling stock. <ul><ul><ul><li>NYSE – New York Stock Exchange (1792) represents the largest/most respected companies in the nation. Largest companies are known as blue chips. Blue chips profit over the long run. </li></ul></ul></ul><ul><ul><ul><li>NASDAQ –Mostly trading technology and energy stocks, this exchange deals with smaller and riskier companies </li></ul></ul></ul><ul><ul><ul><li>OTC Market –New and growing companies have stock traded here and usually offer no dividends. </li></ul></ul></ul>
  59. 59. D. History <ul><ul><ul><li>Investors panicked and 16.4 million shares sold on 10/29/29 (Black Tuesday) compared to a normal 4 to 8 million. </li></ul></ul></ul><ul><ul><ul><li>Fed limits money supply to discourage lending. Little money was available for recovery. </li></ul></ul></ul><ul><ul><ul><li>Americans were cautious about stock until 1990’s. Almost half of households own mutual funds. </li></ul></ul></ul>