Unit 6 – finance


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Unit 6 – finance

  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>Issues a 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
  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 re-chartering of 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. 6. The Federal Open Market Committee <ul><ul><li>Regulates banks to ensure they follow federal laws </li></ul></ul><ul><ul><li>Banker’s bank </li></ul></ul><ul><ul><li>Conducts monetary policy = controlling supply of money. </li></ul></ul>
  15. 15. 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>
  16. 16. 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. </li></ul>
  17. 17. O. Conflicting Progress <ul><li>S& L’s failed after risky loans. </li></ul><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>
  18. 18. II. Modern Banking <ul><li>A. Money Supply – all $ USA. </li></ul><ul><li>M1- Liquidity - money that people can gain access to easily and immediately </li></ul><ul><li>M2 = assets that cannot be used as cash within a short period of time. (Deposits in savings accounts). </li></ul>
  19. 19. 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, write a limited number of checks. Interest high, but variable. </li></ul><ul><li>Certificates of Deposit – Guaranteed of interest over time, withdrawal = fee. </li></ul>
  20. 20. 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 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>
  21. 21. D. Financial Institutions <ul><li>Credit Unions- Organized for specific groups of people, with low interest rates </li></ul><ul><li>Finance Companies – People are more likely to fail paying these back and so interest rates are high. </li></ul>
  22. 22. 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 –Company collects premiums and lends to investors. </li></ul></ul></ul><ul><ul><ul><li>Pension Funds – receives income after working a certain number of years or age. </li></ul></ul></ul>
  23. 23. 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, rates go from AAA/Aaa to D. </li></ul></ul></ul>
  24. 24. 2. Stock Market <ul><li>Stock or equities are shares of ownership in a corporation. </li></ul><ul><li>Dividends – pay stockholders from profits of corporation. Usually paid quarterly. </li></ul>
  25. 25. C. Stock Exchange – Markets for buying and selling stock. <ul><ul><ul><li>NYSE – New York Stock Exchange (1792) </li></ul></ul></ul><ul><ul><ul><ul><li>represents largest/most respected companies in nation. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Big companies are blue chips which profit over the long run. </li></ul></ul></ul></ul><ul><ul><ul><li>NASDAQ –Mostly trading technology, energy stocks, exchange deals with smaller, riskier companies </li></ul></ul></ul>
  26. 26. D. History <ul><ul><ul><li>Investors panicked,16.4 million shares sold on 10/29/29 (Black Tuesday) compared to normal 4 to 8 million. </li></ul></ul></ul><ul><ul><ul><li>Fed limited money supply to discourage lending. </li></ul></ul></ul><ul><ul><ul><li>Americans cautious about stock until 1990’s. </li></ul></ul></ul><ul><ul><ul><li>Half of households now own mutual funds. </li></ul></ul></ul>