Chapter 12
Money and
Financial Institutions
pp. 174-189
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Chapter 12
Learning Objectives
After completing this chapter, you’ll be
able to:
1. Describe the functions and
characteristics of money.
2. Explain the services that banks offer.
continued
Introduction to Business, Money and Financial Institutions
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Chapter 12
Learning Objectives
After completing this chapter, you’ll be
able to:
3. Name the types of banks.
4. Identify the functions of the Federal
Reserve System.
Introduction to Business, Money and Financial Institutions
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Chapter 12
Why It’s Important
Understanding the way money and
financial institutions work is
crucial to understanding the
economy.
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Chapter 12
Key Words
monetary system
money
financial institution
bank account
deposit
withdrawal
interest
Introduction to Business, Money and Financial Institutions
continued
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Chapter 12
Key Words
electronic funds transfer (EFT)
collateral
mortgage
safety-deposit box
Federal Reserve System
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Chapter 12
The History of Money
In the monetary system goods and
services are indirectly exchanged
using money, which can then be
exchanged for other goods and
services.
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Chapter 12
The History of Money
Money can be anything that people
accept as a standard for payment.
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Chapter 12
The History of Money
In other times and places people have
used shells, stones, corn, parrot
feathers, and even gopher tails for
money.
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Chapter 12
Figure
12.1
WOULD THESE ITEMS BE ACCEPTABLE AS MONEY?
Imagine what business would be like without money. If you worked in a
fast-food restaurant, it might pay you in food. Bartering is exchanging
one product for another. American Colonialists engaged in this way of
doing business.
Explain why or why not these items could serve as money. Recreate
this table and check the appropriate box(es) for each that applies.
Introduction to Business, Money and Financial Institutions
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Chapter 12
Functions of Money
The three basic functions of money
are:
1. It is a medium of exchange
2. It is a standard of value
3. It is a store of value
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Chapter 12
Characteristics of Money
For money to carry out its functions, it
must have several characteristics.
Money must be:
• Stable in value
• Scarce
• Accepted
continued
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Chapter 12
Characteristics of Money
Money must be:
• Divisible into parts
• Portable and durable
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Graphic Organizer
Chapter 12
Organizer of Money
Functions Graphic
and Characteristics
FUNCTIONS
CHARACTERISTICS
• Medium of exchange
• Standard of value
• Store of value
•
•
•
•
•
•
Stable
Scarce
Accepted
Divisible
Portable
Durable
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Chapter 12
Fast Review
1. What is the monetary system?
2. How is money a standard of value?
continued
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Chapter 12
Fast Review
3. What are some of the
characteristics money must have to
be useful?
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Chapter 12
Banking
The banking system is the main type
of financial institution, or
organization for managing money, in
our economy.
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Chapter 12
Storing Money
A bank account is a record of how
much money a customer has put into
or taken out of a bank.
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Chapter 12
Storing Money
The money put in a bank is called a
deposit.
The money taken out of a bank is
called a withdrawal.
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Chapter 12
Storing Money
Checking accounts are used for
storing money in the short term so you
can draw on it easily if you want to go
shopping or pay a bill.
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Chapter 12
Storing Money
Savings accounts are used for storing
money over a long period of time.
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Chapter 12
Storing Money
Interest is a rate the bank pays you
for keeping your money there.
If a bank pays you 5 percent interest
per year on a $1,000 savings account,
you’ll have earned $50 after one year.
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Chapter 12
Business Building Blocks
Understanding Interest
Simple interest, compounded annually, is
a percentage of the amount borrowed.
The amount borrowed is called the
principal. Compound interest may be
compounded daily, monthly, or yearly.
continued
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Chapter 12
Business Building Blocks
How to Compute Interest
Simple interest. You borrow $1,000 for
3 years at a rate of 10 percent per year.
Here’s how to find out the amount you
owe at the end of three years:
continued
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Chapter 12
Business Building Blocks
How to Compute Interest
Step 1. Convert the interest rate percent
to its decimal equivalent.
(10% = 10/100 = .10)
continued
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Chapter 12
Business Building Blocks
How to Compute Interest
Step 2. Use this formula:
interest = principal x interest rate x time
continued
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Chapter 12
Business Building Blocks
How to Compute Interest
Decimal
Principal x Interest x Time
Rate
$1,000
x
.10
x
3
=
Interest
=
$300
continued
Introduction to Business, Money and Financial Institutions
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Chapter 12
Business Building Blocks
How to Compute Interest
At the end of 3 years, the cost of the loan
would be $300. Since you also must pay
back the principal, you owe the lender
$1,300.
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Chapter 12
Transferring Money
Banks make it easy to transfer money
from one person or business to
another.
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Chapter 12
Transferring Money
Today more banks are using
electronic funds transfer (EFT) to
move money around.
With EFT, money is transferred from
one account to another through a
network of computers.
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Chapter 12
Lending Money
The money you deposit in a bank
makes it possible for the bank to lend
money to other customers.
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Chapter 12
Lending Money
Most bank loans require some form of
collateral.
Collateral is something valuable you
put up for a loan.
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Chapter 12
Lending Money
The four main types of loans that
banks offer are:
•
•
•
•
A mortgage loan
A commercial loan
An individual loan
A line of credit
continued
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Chapter 12
Lending Money
A mortgage is a deed to give the
property to the lender if the loan is not
paid back.
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Chapter 12
Making an Ethical
Decision
1. What are the most important financial
issues that people should consider when
buying a home?
2. What are the advantages of living in
neighborhoods that are economically
mixed?
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Chapter 12
Other Financial Services
Many banks provide financial advice
on managing and investing your
money.
You can also store valuable items,
such as jewelry and certificates, in
safety-deposit boxes.
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Chapter 12
Other Financial Services
Many banks offer credit cards.
Banks also manage trust funds, such
as an inheritance.
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Chapter 12
Figure
12.2
HOW BANKS DO BUSINESS
Banks are
businesses that
provide financial
services to make a
profit.
What would
happen to a bank’s
profits if deposits
suddenly
decreased?
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Chapter 12
Fast Review
1. What are the three main functions
of a bank?
2. How does an EFT work?
continued
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Chapter 12
Fast Review
3. What are the types of loans a bank
offers?
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Chapter 12
Commercial Banks
Commercial banks offer a full range of
services such as checking and savings
accounts, loans, and financial advice.
They are often called full-service
banks.
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Chapter 12
Commercial Banks
To make a profit, commercial banks
usually charge much more interest on
the money they lend than the interest
they pay on savings accounts.
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Chapter 12
Savings and Loan Associations
Savings and loan associations were
originally set up to offer savings
accounts and home mortgage loans.
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Chapter 12
Savings and Loan Associations
The purpose of the savings and loan
associations was to encourage people
to save money and make it easier to
buy a home or start a business.
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Chapter 12
Savings and Loan Associations
Savings and loan associations
charged lower interest on loans and
paid higher interest on savings.
In the 1980s about 20 percent of
savings and loans failed.
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Chapter 12
Savings and Loan Associations
The government passed new
regulations allowing savings and loan
associations to charge higher interest
rates and offer more services like
credit cards.
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Chapter 12
Credit Unions
Credit unions are nonprofit banks set
up by organizations for their members
to use.
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Chapter 12
Credit Unions
Credit unions offer members a full
range of services, including credit
cards, checking accounts, and loans.
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Chapter 12
Credit Unions
Credit unions offer low-interest loans
and pay high interest rates on savings
accounts.
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Chapter 12
Other Financial Institutions
Mortgage companies provide loans
specifically for buying a home or
business.
Finance companies offer short-term
loans to businesses.
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Chapter 12
Other Financial Institutions
Insurance companies not only provide
protection against things like fire and
theft, but also offer loans to
businesses.
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Chapter 12
Other Financial Institutions
Brokerage firms that sell stocks and
bonds may also offer a wide range of
financial services to its customers.
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Chapter 12
Fast Review
1. What are the types of banks?
2. How is a credit union different from
a commercial bank?
continued
Introduction to Business, Money and Financial Institutions
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Chapter 12
Fast Review
3. Name some financial institutions
other than banks that offer similar
services.
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Chapter 12
The Federal Reserve System
The Federal Reserve System (or Fed)
is the central banking organization in
the United States.
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Chapter 12
The Federal Reserve System
Congress set up the Fed in 1913 to
end the periodic financial panics that
occurred during the 1800s and early
1900s.
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Chapter 12
The Federal Reserve System
The Fed consists of 12 Federal
Reserve district banks, 25 branch
banks, and about 5,000 member
banks.
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Chapter 12
Functions of the Fed
The six functions of the Fed are:
• Clearing checks
• Acting as the federal government’s
•
fiscal agent
Supervising member banks
continued
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Chapter 12
Functions of the Fed
• Regulating the money supply
• Setting reserve requirements
• Supplying paper currency
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Chapter 12
Fast Review
1. What is the Fed?
2. Name the six functions of the Fed.
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Chapter 12
How does the Fed create money?
continued
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Chapter 12
With a 20 percent reserve
requirement, if a bank lends out
$1,000 how much money must it
hold in reserve?
continued
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Chapter 12
A bank must keep in its reserve 20
percent of a new deposit. How
much money does the bank need
to keep if it lends you $800?
continued
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Chapter 12
How does the money supply at a
bank expand?
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End of
Chapter 12
Money and
Financial Institutions
pp. 174-189
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