Money Supply - McGraw Hill Higher Education

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McGraw-Hill/Irwin

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Chapter Twenty

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Money, Financial Institutions, and the Federal Reserve

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

WHAT’S MONEY?

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What is Money?

LG1 *

Money --

Anything people generally accept as payment for goods and services.

Barter --

The direct trading of goods or services for other goods or services.

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STANDARDS for a USEFUL FORM of MONEY

• Portability • Divisibility • Stability • Durability • Uniqueness

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What is Money?

LG1 *

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The MONEY SUPPLY *

What is the Money Supply?

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Money Supply --

The amount of money the Federal Reserve makes available for people. The money supply is referred to as:

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M1 --

Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.).

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M2 –

M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.).

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M3 --

M2 + big deposits like institutional money market funds.

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FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM *

Basics About the Federal Reserve

LG2 *

1. The Board of Governors 2. The Federal Open Market Committee 3. 12 Federal Reserve Banks 4. 3 Advisory Councils 5. The member banks of the system 20-5

MANAGING the MONEY SUPPLY *

Basics About the Federal Reserve

LG2 *

The Fed uses three basic tools:

1. Reserve Requirement --

A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.

2. Open-Market Operations --

selling of government bonds.

The buying and

3. Discount Rate --

The interest rate the Fed charges for loans to member banks.

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The U.S. BANKING SYSTEM *

The U.S. Banking System

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• Commercial banks • Savings and loan associations • Credit unions • Nonbanks 20-7

PROTECTING DEPOSITORS’ MONEY *

Protecting Your Funds

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The Federal Deposit Insurance Company (FDIC) --

An independent agency of the U.S. government that insures bank deposits up to $100,000 ($250,000 until December 2013).

The Savings Association Insurance Fund (SAIF) --

Insures holders of accounts in savings and loan associations.

The National Credit Union Administration (NCUA) --

Provides up to $100,000 coverage per individual depositor per institution.

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MAKING TRANSACTIONS in OTHER COUNTRIES *

International Banking and Banking Services

LG7 *

Letter of Credit --

A promise by the bank to pay the seller a given amount if certain conditions are met.

Banker’s Acceptance --

A promise the bank will pay some specified amount at a particular time.

Money exchange

allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros).

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LEADING INSTITUTIONS in INTERNATIONAL BANKING *

International Banking and Banking Services

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World Bank --

Lends most of its money to less developed nations to improve their productivity and help raise standards of living and quality of life.

International Monetary Fund (IMF) --

Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF.

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