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BA 100 Chapter 18 PowerPoint - Week 8
- 1. ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. CHAPTER 18 Money, Financial Institutions, and the Federal Reserve
- 2. ©McGraw-Hill Education. LEARNING OBJECTIVES 1 of 2 1. Explain what money is and what makes money useful. 2. Describe how the Federal Reserve controls the money supply. 3. Trace the history of banking and the Federal Reserve System. 4. Classify the various institutions in the U.S. banking system.
- 3. ©McGraw-Hill Education. LEARNING OBJECTIVES 2 of 2 5. Briefly trace the causes of the banking crisis, and explain how the government protects your funds during such crises. 6. Describe how technology helps make banking more efficient. 7. Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
- 4. ©McGraw-Hill Education. JANET YELLEN Federal Reserve • The first female chair of the Federal Reserve. • Earned her doctorate in economics from Yale and was appointed to the Federal Reserve Board of Governors by President Clinton. • Almost every factor related to the economy is influenced by the decisions she makes. Photo credit: © Susan Walsh/AP Images
- 5. ©McGraw-Hill Education. NAME that COMPANY This company recently opened an online store using a new form of money. Name that company and what currency it uses!
- 6. ©McGraw-Hill Education. WHAT’S MONEY? LO 18-1 Barter -- The direct trading of goods or services for other goods or services. Money -- Anything people generally accept as payment for goods and services. Photo credit: © Photodisc/Getty Images RF
- 7. ©McGraw-Hill Education. STANDARDS for a USEFUL FORM of MONEY LO 18-1 • Portability • Divisibility • Stability • Durability • Uniqueness Photo credit: Bureau of Engraving and Printing, U.S. Department of the Treasury
- 8. ©McGraw-Hill Education. The BITCOIN is in the MAIL • Bitcoin is a digital currency created in 2008. • It is attractive to many users because there is no central regulating authority. • Transactions are between only two people without middlemen. • This, however, makes valuing Bitcoin difficult. Photo credit: © pagadesign/iStock/360/Getty Images RF
- 9. ©McGraw-Hill Education. The MONEY SUPPLY LO 18-2 Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: - M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.) - M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.) - M3 -- M2 + big deposits like institutional money market funds
- 10. ©McGraw-Hill Education. NEW MONEY Paper Money Printed in 2010 (In $ Billions) LO 18-2 Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.
- 11. ©McGraw-Hill Education. HOW LONG DOES PAPER MONEY LAST? LO 18-2 Bill How Long it Lasts $1 21 Months $5 16 Months $10 18 Months $20 24 Months $50 55 Months $100 89 Months Source: Federal Reserve, www.federalreserve.gov, accessed November 2014.
- 12. ©McGraw-Hill Education. MONEY MILESTONES LO 18-2 Year Milestone 1956 Congress set the minimum wage at $1 an hour 1960 $10 million presidential campaign by candidate Richard Nixon 1985 $100,000 bottle of wine sold at auction at Christie’s 1995 $1 million cost for a 30-second commercial during Super Bowl XXIX 2001 $10 movie ticket in New York 2004 $100 million Picasso painting sold at Sotheby’s 2007 $1 billion stadium built in London (Wembley)
- 13. ©McGraw-Hill Education. MONEY FACTS What You Might Not Know About What’s in Your Wallet LO 18-2 • In 2009, the U.S. printed 26,000,000 bills a day! • Each penny costs 1.6¢ and each nickel costs 6¢ to make. • The most-tracked bill on WheresGeorge.com has travelled over 4,100 miles in 3 years! • 2/3 of all U.S. $100 bills are outside the U.S. • 90% of paper money has traces of cocaine! Source: Fast Company, wwww.fastcompany.com, accessed November 2014.
- 14. ©McGraw-Hill Education. EXCHANGING MONEY GLOBALLY LO 18-2 Falling dollar value: The amount of goods and services you can buy with a dollar decreases. Rising dollar value: The amount of goods and services you can buy with a dollar increases. What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies.
- 15. ©McGraw-Hill Education. The IMPACT of a FALLING DOLLAR LO 18-2 • U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers. • Overseas demand for U.S. products rise. • A favorable exchange rate for U.S. companies increases profits in foreign markets.
- 16. ©McGraw-Hill Education. FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM LO 18-2 1. The Board of Governors 2. The Federal Open Market Committee 3. 12 Federal Reserve Banks 4. 3 Advisory Councils 5. The member banks of the systemPhoto credit: Pixtal/AGE Fotostock
- 17. ©McGraw-Hill Education. The 12 FEDERAL RESERVE DISTRICT BANKS LO 18-2
- 18. ©McGraw-Hill Education. MANAGING the MONEY SUPPLY LO 18-2 Jump to Appendix 1 for long image description
- 19. ©McGraw-Hill Education. CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE LO 18-2 Jump to Appendix 2 for long image description
- 20. ©McGraw-Hill Education. TEST PREP 1. What is money? 2. What are the five characteristics of useful money? 3. What is Bitcoin? 4. What is the money supply, and why is it important? 5. How does the Federal Reserve control the money supply? 6. What are the major functions of the Federal Reserve? What other functions does it perform?
- 21. ©McGraw-Hill Education. The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM LO 18-3 A cash shortage problem in 1907 led to the creation of the Federal Reserve System. Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve. Photo credit: © Bettmann/Corbis
- 22. ©McGraw-Hill Education. LARGEST BANK FAILURES LO 18-3 Bank Year Assets Washington Mutual Bank 2008 $307 Billion Continental Illinois NB&T 1984 $67 Billion First Republic Bank Corp 1986 $49 Billion IndyMac Bank 2008 $32 Billion American Savings & Loan Assn 1988 $30 Billion Colonial Bank 2009 $25 Billion Source: FDIC.gov, accessed November 2014.
- 23. ©McGraw-Hill Education. The U.S. BANKING SYSTEM LO 18-4 • Commercial banks • Savings and loan associations • Credit unions • Nonbanks Photo credit: © Finnbarr Webster / Alamy
- 24. ©McGraw-Hill Education. COMMERCIAL BANKS LO 18-4 Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans. A commercial bank has two types of customers: 1. Depositors 2. Borrowers
- 25. ©McGraw-Hill Education. COMMERICAL BANKS’ SERVICES LO 18-4 Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor. Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal. Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date.
- 26. ©McGraw-Hill Education. WOULD YOU TELL the TELLER? • The bank teller mistakenly gives you $320 instead of the $300 you asked for. • You bring the error to her attention, but she disagrees she miscounted the money. • You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day. • What are your alternatives? What do you do?
- 27. ©McGraw-Hill Education. SAVINGS and LOAN ASSOCIATIONS LO 18-4 Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans. Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership.
- 28. ©McGraw-Hill Education. CREDIT UNIONS LO 18-4 Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. As nonprofits, credit unions enjoy an exemption from federal income taxes. Photo credit: © Tom Carter/Alamy RF
- 29. ©McGraw-Hill Education. NONBANKS LO 18-4 Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include: – Life insurance companies – Pension funds – Brokerage firms – Commercial finance companies – Corporate financial services
- 30. ©McGraw-Hill Education. TAKING a BITE OUT of the SHARKS • Dealstruck is a new type of alternative, nonbank lender. • It uses a peer-to-peer model where wealthy investors provide capital for the loans. • Interest rates range from 8 to 24% for loans up to $250,000 and can stretch for a period of three years. Photo credit: © YAY Media AS/Alamy RF
- 31. ©McGraw-Hill Education. WHAT ATTRACTS CUSTOMERS to ONLINE BANKING LO 18-4 • Free identity theft protection • Free credit score monitoring • Personal financial management • Instant messaging service • Bank’s blog Source: comScore, www.comscore.com, accessed November 2014.
- 32. ©McGraw-Hill Education. TEST PREP 1 of 2 1. Why did the U.S. need a Federal Reserve Bank? 2. What is the difference between a bank, a savings and loan association, and a credit union? 3. What is a consumer finance company?
- 33. ©McGraw-Hill Education. The BANKING CRISIS LO 18-5 • Almost 5 million households suffered through housing foreclosures since 2007. • Since the banks owned the mortgages, their profits declined. • This led to a banking crisis and the government had to help the banks out. • Assigning blame to only one agency is not possible, but it had to be fixed. Photo credit: © Andy Dean Photography/Alamy RF
- 34. ©McGraw-Hill Education. PROTECTING DEPOSITORS’ MONEY LO 18-5 The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $250,000. The Savings Association Insurance Fund (SAIF) - - Insures holders of accounts in savings and loan associations. The National Credit Union Administration (NCUA) -- Provides up to $250,000 coverage per individual depositor per institution.
- 35. ©McGraw-Hill Education. TECHNOLOGICAL ADVANCEMENTS in BANKING LO 18-6 Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically. Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account. Photo credit: © Ian Dagnall Smartphones/Alamy
- 36. ©McGraw-Hill Education. SMART CARDS LO 18-6 Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more. Photocredit:©GeorgeRuhe/Redux
- 37. ©McGraw-Hill Education. MAKING TRANSACTIONS in OTHER COUNTRIES LO 18-7 Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time. Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros).
- 38. ©McGraw-Hill Education. LEADING INSTITUTIONS in INTERNATIONAL BANKING LO 18-7 World Bank -- Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life. International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 188 countries are a part of the IMF. Photo credit: © Yoshikazu Tsuno/AFP/ Getty Images
- 39. ©McGraw-Hill Education. NEW DAY, NEW ISSUES ACROSS the GLOBE • The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious. • Christine Lagarde, managing director of the IMF, fears the financial crisis did lasting harm to the potential pace of growth in many global economies. • The IMF and World Bank are both trying to solve key global issues before there is another serious crisis.
- 40. ©McGraw-Hill Education. TEST PREP 2 of 2 1. What are some of the causes for the banking crisis? 2. What is the role of the FDIC? 3. How does a debit card differ from a credit card? 4. What is the World Bank and what does it do? 5. What is the IMF and what does it do?
- 41. ©McGraw-Hill Education. Appendix 1: MANAGING the MONEY SUPPLY Reserve Requirements: • Increase the reserve requirement: Banks put more money into the Fed, reducing money supply; thus, there is less money available to lend to customers. This has the long-term effect of slowing the economy. • Decrease the reserve requirement: Banks put less money into the Fed, increasing the money supply; thus, there is more money available to lend to customers. This has the long-term effect of speeding up the economy. Open-Market Operations: • Fed sells bonds: Money flows from the economy to the Fed. This has the long-term effect of slowing the economy. • Fed buys bonds: Money flows into the economy from the Fed. This has the long-term effect of speeding up the economy. Managing the Discount Rate • Rate increases: Banks borrow less from the Fed; thus, there is less money to lend. This has the long-term effect of slowing the economy. • Rate decreases: Banks borrow more from the Fed; thus, there is more money to lend. This has the long-term effect of speeding up the economy. Return to slide
- 42. ©McGraw-Hill Education. Appendix 2: CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE 1. The buyer (a farmer in Quince Orchard, MD) sends his check to the seller (a tractor dealer in Austin, TX). 2. The dealer deposits the check in his account at a local bank in Austin. 3. The Austin bank deposits the check for credit in its account at the Federal Reserve Bank of Dallas. 4. The Federal Reserve Bank of Dallas sends the check to the Federal Reserve Bank of Richmond for collection. 5. The Federal Reserve Bank of Richmond forwards the check to the local bank in Quince Orchard, where the farmer has his account. 6. The local bank in Quince Orchard deducts the check amount from the farmer’s account. 7. The Quince Orchard bank authorizes the Federal Reserve Bank of Richmond to deduct the check amount from its deposit account with the Federal Reserve Bank. 8. The Federal Reserve Bank of Richmond pays the Federal Reserve Bank of Dallas. 9. The Federal Reserve Bank of Dallas credits the Austin bank’s deposit account. 10. The Austin bank credits the tractor dealer’s account. Return to slide
Editor's Notes
- Companies: The Bitcoin Shop and Bitcoin
- See Learning Objective 1: Explain what money is and what makes money useful.
- See Learning Objective 1: Explain what money is and what makes money useful. The new $100 bill has features like a 3D ribbon, as well as ink with microscopic flakes that shift color.
- See Learning Objective 1: Explain what money is and what makes money useful.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. This slide shows the value of different bills printed in 2010. In 2010 over 1 billion $1 bills, 2 billion $20 bills, and over 2 billion $100 bills were printed. Most of the value of U.S. currency is $100 bills. In 2010 the U.S. printed more bills in every category but $1s and $50s when compared to 2009.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. This slide gives the students an idea of the life span of paper money in circulation. The largest denomination ever printed was a $100,000 gold certificate. Share with students some interesting facts regarding U.S. currency: - Originally, U.S. currency included denominations of $500, $1,000, $5,000, and $10,000. No currency printed today is greater than $100 dollars. - The percent of U.S. counterfeit currency in circulation is estimated to be .02%. - U.S. Currency bills are 2.61 inches wide, 6.14 inches long, thickness of .0043 inches and weighs 1 gram. - It costs 4.2 cents to produce a U.S. bill. - The Bureau of Engraving prints about 16,650,000 one dollar bills per day. (Source: enchantedlearning.com)
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. This slide illustrates some interesting dates regarding U.S. money Have students look through the dates. Which do they find most interesting or surprising and why? Ask students: How do some of the amounts listed compare to today?
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. The Impact of a Falling Dollar This slide highlights some of the issues related to a falling dollar. While these points are positive, the long term implications of a falling dollar are more serious. A declining dollar will eventually result in the following: Higher interest rates on government and consumer debt. Higher inflation due to a rise in the price of imports, and commodity prices increase since most are priced in terms of U.S. dollars.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. The Federal Reserve is a quasi-governmental agency not under the direct control of the U.S. government.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply. This slide is based on Figure 18.1.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply.
- See Learning Objective 2: Describe how the Federal Reserve controls the money supply.
- Money can be anything that people accept as payment for goods and services. The five characteristics of useful money are: Portability, divisibility, stability, durability, and uniqueness. Bitcoin is a form of digital currency created in 2008. It has no central authority regulating its use and can be difficult to compute a dollar value. The money supply is the amount of money available for people to buy goods and services. It is important to manage the money supply, since too much money could cause inflation and too little money may cause deflation. To control the money supply the Federal Reserve can increase or decrease the reserve requirement, buy or sell government securities, or change the discount rate. The Federal Reserve is responsible for creating an environment that fosters stable prices and full employment. It attempts to manage these two goals with monetary policy. The Federal Reserve is also responsible for the clearing of checks.
- See Learning Objective 3: Trace the history of banking and the Federal Reserve System. State banks were also permitted to join.
- See Learning Objective 3: Trace the history of banking and the Federal Reserve System. This slide highlights the largest bank failures in U.S. banking history. Three of these failures are a direct result of the financial crisis that started in 2008. Ask students: Why didn’t the Washington Mutual and IndyMac Bank failures create a total loss of confidence in the United States banking system like we saw during the Great Depression? (Students should be able to recognize the stepped up role of the US government including the creation of the FDIC insurance program and the increase in FDIC coverage from $100,000 to $250,000.)
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system. Commercial banks also offer credit cards, financial counseling, automatic payment of bills, brokerage services, safe-deposit boxes, travelers checks, and individual retirement accounts (IRAs).
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system. Due to their exemption from federal income taxes, credit unions: fees are typically less and the interest rates paid on deposits are often higher.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- See Learning Objective 4: Classify the various institutions in the U.S. banking system.
- The Federal Reserve emerged after the banking crisis of 1907 and was organized originally to be a lender of last resort. After bank deregulation, the services offered by banks and S&Ls are now similar. They both offer many of the same services. Credit Unions are tax-exempt member-owned cooperatives that operate like banks. Consumer finance companies offer short-term loans to those who cannot meet the credit requirements of regular banks.
- See Learning Objective 5: Briefly trace the causes of the banking crisis, and explain how the government protects your funds during such crises.
- See Learning Objective 5: Briefly trace the causes of the banking crisis, and explain how the government protects your funds during such crises. The amount of depositors’ insurance was increased to $250,000 create confidence in the banking system.
- See Learning Objective 6: Describe how technology helps make banking more efficient.
- See Learning Objective 6: Describe how technology helps make banking more efficient.
- See Learning Objective 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
- See Learning Objective 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund. Both the World Bank and the IMF were created to rebuild the world economy after World War II.
- See Learning Objective 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
- After the internet bubble of the late 1990s, the Federal Reserve lowered interest rates creating a situation in which mortgage rates were low thus fueling a housing boom. Banks relaxed their underwriting standards and created mortgage-backed securities and sold them to organizations throughout the world. The government did not regulate these transactions well and banks collapsed as housing values fell and individuals defaulted on their loans. The role of the FDIC is to insure bank deposits if a bank were to fail. Bank deposits are currently insured up to $250,000. Unlike a credit card a debit card functions as a check, withdrawing funds directly from a checking account. The debit card only allows you to spend money that is in your account; once the balance is zero the card cannot be used. If the card is used with a zero balance, it will result in overdrafts. The World Bank, also called the International Bank for Reconstruction and Development, is responsible for financing economic development. The IMF was established to assist the smooth flow of money among nations. Nations must join the IMF and allow for flexible exchange rates, inform the IMF of changes in a country's monetary policy, and to modify policies on the advice of the IMF.