Chapter Fourteen
Money and
the Financial System
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
Money in the Financial System
Finance
Money
The study of money-how it’s made, how
it’s lost, and why
Anything generally
accepted in exchange
for goods and services
14-3
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
The Functions of Money
Medium of exchange
Accepted as payment for products and
resources
Measure of value
Single standard for assigning and comparing
values of products and resources
Store of value
Means of retaining and accumulating wealth
14-4
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The Characteristics of Money
Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
14-5
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The Life Expectancy of Paper
Currency
Did You Know?
Experts estimate that more than $130 million in
counterfeit U.S. bills is circulating around the world.
14-6
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Types of Money
Checking account
Savings account
Money market account
Certificate of deposit
Credit card
Debit card
Traveler’s check
Money order
Cashier’s check
14-7
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A Check
14-8
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Facts About Checks
About 13 million US households do not have
checking accounts
180 million checks are cashed annually in 3,700
check-cashing stores for a value of $55 billion
85% of checks cashed are payroll checks and the
average check is about $300
14-9
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Facts About Credit Cards
MasterCard and Visa are the 2 major credit cards
American Express is the dominant travel &
entertainment credit card
Americans hold over $675 billion in credit card
debt
14-10
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Facts About Debit Cards
A debit card looks like a credit card but works
like a check
A debit card gives a direct, immediate electronic
payment to a merchant from the cardholder’s
checking account
They lack credit, offer no “grace period,” and
provide no paper trail of transactions
14-11
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The American Financial System
The Federal Reserve System
An independent agency of the federal
government established in 1913 to regulate the
nation’s banking and financial industry
Banking Institutions
Businesses whose objective is to earn money
by managing, safeguarding, and lending
money to others
14-12
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The Federal Reserve System
14-13
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The Functions of the Federal Reserve
Board
To control the money supply with
monetary policy
To regulate financial institutions
To manage regional and national checkclearing procedures
To supervise the federal deposit insurance
of commercial banks in the Federal
Reserve system
14-14
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The Federal Reserve’s Monetary
Policies
Open market operations
Reserve requirements
Discount rate
Credit controls
14-15
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Fed Tools for Regulating
the Money Supply
14-16
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Banking Institutions
Commercial banks
Savings and loan associations
Credit unions
Mutual savings banks
14-17
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Insurance for Banking Institutions
Federal Deposit Insurance Corporation
(FDIC)
Insures personal accounts up to a maximum of
$100,000
National Credit Union Association
(NCUA)
Regulates and charters credit unions and
insures their deposits through its National
Credit Union Insurance Fund
14-18
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Non-Banking Institutions
Insurance companies
Pension funds
Mutual fund
Brokerage firms
Non-financial firms
Finance companies
14-19
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Leading Diversified Financial
Services Firms
14-20
Electronic Banking
ETF
Electronic funds transfer
ATM
Automated teller machines
ACHs
Automated clearinghouses
Online banking
14-21
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
ATM Facts
The top 5 ATM owners are Bank of America, Wells
Fargo, E-Trade Bank, American Express, and Bank One
The average ATM withdrawal is $60
ATM customers spend 20-25% more than non-ATM
customers
60% of Americans ages 25-34 use ATMs 8 times a month
The most popular day for ATM usage is Friday
Source: “ATM Fact Sheet,” Press Room: ATMfacts 2001, September 18,2001.
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Challenge and Change in the
Commercial Banking Industry
Some commercial banks made poor
managerial decisions in the early 1980s,
resulting in several failures
Gramm-Leach-Bliley Bill
Banks were allowed to offer insurance,
brokerage, and investment banking services
14-23
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Solve the Dilemma
1. List the various types of U.S. financial
institutions and the primary functions of
each.
2. What services of each financial
institution is Hill’s new company likely
to need?
3. Which single financial institution is
likely to best meet Hill’s small
company’s needs now?
14-24
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Explore Your Career Options
In what industries are
economists likely to be
asked to provide economic
projections?
14-25
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Additional Discussion Questions
and Exercises
1. Look at Figure 14.2 in your textbook and
determine in which of the 12 Federal
Reserve Districts you are located.
What is the nearest Federal Reserve bank city
or Federal Reserve branch city?
2. What is meant by a demand deposit?
14-26
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Additional Discussion Questions
and Exercises
3. Why have credit cards become a popular
substitute for money?
4. What are the advantages of automated
teller machines (ATMs) for customers?
For banks?
14-27
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Chapter 14 Quiz
1. Most paper currency is lightweight; the weight of money
applies to which characteristic of money?
a.
b.
c.
d.
Durability
Stability
Divisibility
Portability
2. The percentage of deposits that a banking institution
must hold in reserve, either in the bank itself or in a
Federal Reserve Bank, and not loan to businesses or
individuals is the
a.
b.
c.
d.
Discount rate.
Reserve requirement.
M1.
Depository insurance.
14-28
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Chapter 14 Quiz
3. The largest of all banking institutions in the United
States are
a.
b.
c.
d.
savings and loan associations.
commercial banks.
credit unions.
mutual savings banks
4. The failure of the savings and loan associations and the
problems in some commercial banks were caused
primarily by
a.
b.
c.
d.
high government taxes on banking institutions.
bad real estate loans.
failure of students to repay college loans.
electronic funds transfer.
14-29
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Multiple Choice Questions
about the Video
1.
Bank One first began operations in
a.
b.
c.
d.
2.
1863.
1983.
1871.
2004.
The merger of Bank One and J.P. Morgan Chase
created the ______ largest bank in the United States in
2004.
a.
b.
c.
d.
first.
second.
third.
fourth.
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Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved