4. Why It’s Important Understanding the way money and financial institutions work is crucial to understanding the economy.
5. Key Words monetary system money financial institution bank account deposit withdrawal interest continued
6. Key Words electronic funds transfer (EFT) collateral mortgage safety-deposit box Federal Reserve System
7. The History of Money In the monetary system goods and services are indirectly exchanged using money, which can then be exchanged for other goods and services.
8. The History of Money Money can be anything that people accept as a standard for payment.
9. The History of Money In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.
10. Figure 12.1 WOULD THESE ITEMS BE ACCEPTABLE AS MONEY? Imagine what business would be like without money. If you worked in a fast-food restaurant, it might pay you in food. Bartering is exchanging one product for another. American Colonialists engaged in this way of doing business. Explain why or why not these items could serve as money. Recreate this table and check the appropriate box(es) for each that applies.
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17. Banking The banking system is the main type of financial institution , or organization for managing money, in our economy.
18. Storing Money A bank account is a record of how much money a customer has put into or taken out of a bank.
19. Storing Money The money put in a bank is called a deposit . The money taken out of a bank is called a withdrawal .
20. Storing Money Checking accounts are used for storing money in the short term so you can draw on it easily if you want to go shopping or pay a bill.
21. Storing Money Savings accounts are used for storing money over a long period of time.
22. Storing Money Interest is a rate the bank pays you for keeping your money there. If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year.
23. Simple interest, compounded annually, is a percentage of the amount borrowed. The amount borrowed is called the principal. Compound interest may be compounded daily, monthly, or yearly. continued Understanding Interest Business Building Blocks
24. Simple interest . You borrow $1,000 for 3 years at a rate of 10 percent per year. Here’s how to find out the amount you owe at the end of three years: continued How to Compute Interest Business Building Blocks
25. Step 1. Convert the interest rate percent to its decimal equivalent. continued How to Compute Interest Business Building Blocks (10% = 10/100 = .10)
26. Step 2. Use this formula: interest = principal x interest rate x time continued How to Compute Interest Business Building Blocks
27. Principal continued How to Compute Interest Business Building Blocks Decimal Interest Rate Time Interest = x x $1,000 x .10 x 3 = $300
28. At the end of 3 years, the cost of the loan would be $300. Since you also must pay back the principal, you owe the lender $1,300. How to Compute Interest Business Building Blocks
30. Transferring Money Today more banks are using electronic funds transfer (EFT) to move money around. With EFT, money is transferred from one account to another through a network of computers.
31. Lending Money The money you deposit in a bank makes it possible for the bank to lend money to other customers.
32. Lending Money Most bank loans require some form of collateral. Collateral is something valuable you put up for a loan.
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34. Lending Money A mortgage is a deed to give the property to the lender if the loan is not paid back.
35. Other Financial Services Many banks provide financial advice on managing and investing your money. You can also store valuable items, such as jewelry and certificates, in safety-deposit boxes .
36. Other Financial Services Many banks offer credit cards. Banks also manage trust funds, such as an inheritance.
37. Figure 12.2 HOW BANKS DO BUSINESS Banks are businesses that provide financial services to make a profit. What would happen to a bank’s profits if deposits suddenly decreased?
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40. Commercial Banks Commercial banks offer a full range of services such as checking and savings accounts, loans, and financial advice. They are often called full-service banks .
41. Commercial Banks To make a profit, commercial banks usually charge much more interest on the money they lend than the interest they pay on savings accounts.
42. Savings and Loan Associations Savings and loan associations were originally set up to offer savings accounts and home mortgage loans.
43. Savings and Loan Associations The purpose of the savings and loan associations was to encourage people to save money and make it easier to buy a home or start a business.
44. Savings and Loan Associations Savings and loan associations charged lower interest on loans and paid higher interest on savings. In the 1980s about 20 percent of savings and loans failed.
45. Savings and Loan Associations The government passed new regulations allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.
46. Credit Unions Credit unions are nonprofit banks set up by organizations for their members to use.
47. Credit Unions Credit unions offer members a full range of services, including credit cards, checking accounts, and loans.
48. Credit Unions Credit unions offer low-interest loans and pay high interest rates on savings accounts.
49. Other Financial Institutions Mortgage companies provide loans specifically for buying a home or business . Finance companies offer short-term loans to businesses.
50. Other Financial Institutions Insurance companies not only provide protection against things like fire and theft, but also offer loans to businesses.
51. Other Financial Institutions Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to its customers.
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54. The Federal Reserve System The Federal Reserve System (or Fed) is the central banking organization in the United States.
55. The Federal Reserve System Congress set up the Fed in 1913 to end the periodic financial panics that occurred during the 1800s and early 1900s.
56. The Federal Reserve System The Fed consists of 12 Federal Reserve district banks, 25 branch banks, and about 5,000 member banks.
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60. A bank must keep in its reserve 20 percent of a new deposit. How much money does the bank need to keep if it lends you $800? continued
61. pp. 174-189 End of Chapter 12 Money and Financial Institutions
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