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