Unit 6 finance academic
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    Unit 6 finance academic Unit 6 finance academic Presentation Transcript

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