19 Understanding Money and Banking
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Chapter 19
Sr.Chapter Chapter HeadingNo.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
Course Outline
TOC
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
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
Characteristics of a Good Money System
Divisible Portable Durable Hard to
Counterfeit Stable in Value
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WA SHINGTON, D.C.
TH I S N O TE IS LE G A L T E N DE R
F O R A LL D E B T S , P UB LI C AN D P RIV A T E
S E RI ES
19 85
H 293
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
The Money Supply
Currency
Demand Deposit
s
= TotalM1
+Time
Deposits & Money
Market Accts.
Total M2 *SA
*SA = Seasonally Adjusted
+ =
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.
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
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
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 Clearing4. Controlling the money supply5. Monetary policy;
money supply and interest rates
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
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
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