This document provides an overview of money and banking concepts including: 1) It defines money and describes its key characteristics as a medium of exchange, store of value, and unit of account. 2) It explains the US financial system including the functions of commercial banks and the money supply consisting of currency, demand deposits, and total M1 and M2 aggregates. 3) It describes the Federal Reserve System as the central bank that acts as the government's bank, serves commercial banks, and controls the money supply through monetary policy and interest rates.

1. Chapter 19
19 Understanding Money and
Banking
http://www.slideshare.net/Subjectmaterial

2. Sr. Chapter Chapter Heading
No.No.
1. 3 Understanding the Global context of business (110212)
2. 4 Conducting Business Ethically and Responsibly (250212)
3. 6 Organizing the Business Enterprise (030312)
4. 7 Understanding Entrepreneurship and Small Business (100312)
5. 8 Managing Human Resources (240312)
6. 9 Understanding Employee Motivating, Satisfying & Leadership (3103, 0704)
7. 11 Understanding Marketing Processes and Consumer Behavior (140412)
8. 16 Managing Quality and Productivity (280412)
9. 17 Managing Information Systems and Communication Technology (0505)
10. 19 Understanding Money and Banking (1205)
11. 20 Intermediate Term and Lease Financing

3. 1. WHAT IS MONEY
2. THE US FINANCIAL SYSTEM
3. THE FEDERAL RESERVE SYSTEM
4. THE CHANGING MONEY AND BANKING
SYSTEM
5. INTERNATIONAL BANKING AND FINANCE

4. Money
 Any object that portable, divisible, durable,
and stable and serves as a medium of
exchange, a store of value, and a unit of
account
 Any object generally accepted as payment
for goods and services

5. Characteristics of
a Good Money System
 Divisible
 Portable
 Durable 12
TH E UN IT ED ST AT ES O F A M ER ICA
TH E U N ITED S TAT ES O F AM ERIC A
T H I S N O T E IS L E G A L T E N D E R
F O R A L L D E B T S , P U B L I C A N D P R IV A T E
A
F E D ER A L R E SE R V E N O TE
L 70 7 44 62 9F
W A S H IN G T O N , D .C . 12
Hard to
H 293
L 70 74 46 29 F
12 S E R IES 12
19 85

O N E D O LLA R
O N E D O LLAR
Counterfeit
 Stable in Value

6. Functions of Money
 Medium of exchange
 a single medium of exchange for goods
and services instead of barter
 Store of value
 can be used for future purchases
 Unit of account
 allows measurement of the relative value
of goods and services

7. Credit Cards
 Plastic money
 They are popular because
 Convenient
 Safe
 Very profitable for the issuer
 11 to 20 % interest on dues paid to card issuers
 Merchants pay fee to card issuers
7

8. The Money Supply
Time Deposits
Demand Total
Currency + = Total + & Money =
Deposits M1 Market Accts. M2 *SA
*SA = Seasonally Adjusted

9. The money supply could be explained as follows
 Liquidity is how fast something can be turned into cash. Students
may recall this concept from Chapter 18.
 Currency includes all coins and paper money spent to purchase goods
and services. To the surprise of many, currency is a small portion of
the money supply (only about 20-25%). Traveler’s checks, money
orders, and cashier’s checks are all considered currency.
 Demand deposits are the other part of M1. These are deposits held
at banks that depositors can write checks on for immediate payments.
No specific notice has to be provided to the banks. Checks are used in
about 70% of the transactions in the U.S. but numbers are decreasing
as more consumers begin to use online services and automatic
payment options.
 Total M1 includes the currency and demand deposits of the money
supply.
 Total M2 includes time deposits and money market accounts (funds of
short term, low risk fin securities purchased with the assets of investor
owners, pooled by a non-bank institution) plus the total currency and
demand deposits from M1. Students should be aware that time
deposits are generally referred to as savings accounts.

10. Financial Institutions
 Traditionally consisted of four financial pillars
 Chartered banks
 Alternate banks (trust companies, credit unions)
 Life insurance companies and specialized lending and saving
intermediaries
 Investment dealers
Commercial Bank: Federal or state-chartered
financial institutions accepting deposits that it
uses to make loans and earn profits
Differences are now blurred due to changes in financial industry regulations

11. Special Financial Services
 Pension and Trust Services
 International Services
 Currency exchange
 Letter of Credit (LC)
 Financial Advice and Brokerage Service
 Automated teller machine ATM
 Electronic Fund Transfers
11

12. THE FEDERAL RESERVE SYSTEM
 Central bank, which acts as the
government’s bank, serves member
commercial banks, and controls the
nation’s money supply
12

13. Functions of Fed
1. The govt bank:
 How many notes (bills) to produce, how many to destroy
 Lends money to the govt
2. The Banker’s bank
 Banks borrow money on interest from fed
3. Check Clearing
4. Controlling the money supply
5. Monetary policy;
 money supply and interest rates
13

14. THE CHANGING MONEY AND
BANKING SYSTEM
 Electronic Technologies
 Debit Cards:
 Plastic card that allows an individual to transfer
money between accoutns
 Point of Sale Terminal
 Electric device that accepts debit card transactions
 E-cash
 Money that moves among consumers and
businesses via digital electronic transmissions
14

15. International Bank Structure
 World Bank
 UN agency that provides a limited scope of
financial services, such as funding national
improvement in undeveloped countries
 International Monetary Fund (IMF)
 UN agency consisting of about 150 nations that
have combined resources to promote stable
exchange rates, provide temporary short-term
loans, and serve other purposes
15