Chapter 7: The Economy and the Consumer



Chapter 7: The Economy and the Consumer

Objectives:

1. Name five freedoms or rights that businesses have in the United States.

2. Name four responsibilities of businesses in the United States.

3. Name and describe the three phases of the business cycle.

4. Explain the law of supply and demand.

The Free Enterprise System:

• The Freedoms

o Competition: Companies lowering service costs so that it changes the lowest sales price

o Stock: Shares in a business

o Profit: Money remained after expenses are paid

o Invest: Use money to make more money

• The Responsibility

o Reinvested: Put back into the business

o Demand: Quantity of goods buyers will purchase

• The Safeguards

o Constraints: Restrictions

o Workers are protected now

The Business Cycle:

• Prosperity: Economic conviction in which people have money to spend

• Debts: Money owed

• Recession: Period of reduced business activity

• Depression: Period of low business activity and high employment

• Recovery: Increase in sales and production following a recession or depression

• Business Cycle: Periods of prosperity and recession

How the Economy Affects the Consumer:

Inflation:

• Inflation Factors:

o Supply and Demand: The Relationship between quantity and price

o Standard of Living: level of necessities and comforts that a group of people expect to be able to buy

o Strikes: When workers decide to rebel and not work, trying to make the company change in some way

• Decline of Productivity:

o Productivity: Amount of output per unit of input

o If productivity is lower and demand remains steady, prices will be higher

• Deficit Spending by the Government:

o Deficit Spending: Spending more money than is taken in

o Interest Rate: Price paid to borrow money

• Coping with Inflation

Unemployment

o Unemployment: State of being without a job

o Interest rates

o Federal dept: amount of money owed by the federal government

o Federal Reserve Bank System (FRBS): Federal organization that controls the amount of money available for loans

The Federal Budget

o Federal Budget: the plan for spending federal tax money

o Progressive Tax: Tax that increases in relation to increased earnings

4 major steps for Financial Planning

(setting financial goals

(estimating income

(estimating expenses

(planning your spending

Setting Financial Goals

( know your budget before setting goals

-ex. If you are raising a family, your family member’s values will differ.

( when writing your down goals be as specific as possible

Estimating Income

(write down all the income you expect to receive during your planning period

-write down wages and other income that you can count on getting

-include money from gifts, interest from savings, and bonds, tips, or others

Estimating Expenses

(flexible essential expenses: payments for necessary items, such as food and

clothing, that vary from month to month

(fixed expenses: payments such as rent and insurance that are the same amount

each time you pay them

(Reviewing Spending Practices

-paying yourself first: putting money in savings for later use before paying

for essentials and non-essential items

Planning Your Spending

(Base your plan on two things

-your goals or your family’s goals

-your estimates of income and expenses

(The five-part plan

1. Write down your estimate for the next 12 months

2. Write down your obligations, what you must pay

3. Write down the differences between your estimated income and your

estimated expenses for essential items

4. Write down how much you plan to save to reach your or your family’s

goals

-payroll deduction plan: money that is put into a savings account before

you receive your paycheck

5. Write down how you plan to spend money left after paying essential

expenses and saving for your goals

-discretionary spending: using your money according to your own good

judgment

(Following Your Spending Plan

-keep track of how you actually spend your money, so you know where

the money goes

(Making Your Spending Plan Work For You

- decide on a special place for your financial records, then keep them all

together

- pay monthly bills on a definite date or dates, always on time to avoid

extra interest payments and late charges

-credit rating: records that are kept by credit report companies of how well

you pay your bills

- stick with it, the most difficult thing about using a spending plan is

following it

-review your spending plan regularly

Obstacles to Good Money Management

(one of the main obstacles to good money management is impulse buying

-impulse buying: purchasing items that we would like but had not planned

to buy

(stores encourage impulse buying by setting up

- attractive displays

(impulse buying on credit is damaging and the quickest way to financial ruin

Managing Two Incomes

(when both husband and wife work outside of home there are added expenses

-transportation costs

-second car

-clothing to be worn on the job

-dining out more often

-purchasing costly convenience foods

-child care

Checklist For Controlling Spending

* review your goals and let them guide your spending

* estimate your income

* estimate your fixed and flexible essential expenses

* use the difference between income and essential expenses to plan savings and

discretionary spending

* keep financial records

* pay bills on time

* review your spending plan regularly

* stick with your plan

Chapter 9

Using Banking Services

“Today people depend on banks to hold their cash, instead

of caring large amounts of money around.”

“Banks hold money for safety, to facilitate paying money to other

persons or companies, to provide savings plans, and to make loans.”

“Functions banks perform are financial services. As a consumer you

should know about these financial services and which ones you can use.”

Financial Institutions

• Banks were first established as a safekeeping of money, but today have become specialist in the transfer of money and credit.

• The two most common banks in the U.S. are commercial banks and savings banks.

1. Commercial Banks – full service banks offering a wide range of financial service.

2. Savings Banks – state chartered banks offering fewer financial services than commercial banks.

3. Savings and loan associations and credit unions offer some similar services.

Commercial Banks

• Commercial banks are sometimes referred to as full service banks.

• They include:

1. Checking accounts

2. Savings accounts

3. Savings Certificates

4. Credit Card Services

5. Loans

6. Cashiers and Travelers Checks

7. Safe Deposit Boxes

8. Trust Services

• Commercial banks are organized as corporations and are chartered by either the federal government or the state.

• They are a business to earn profit.

Savings Banks

• Also chartered by the state.

• They are too a business to earn profit

• Savings banks are more limited than commercial banks but include:

1. Savings accounts

2. Loans (including home mortgages)

3. Travelers Checks

4. Safe Deposit Boxes

Savings and Loan Associations

• Not banks, regulate under a different set of regulations

• Businesses to earn profit

Credit Unions

• Nonprofit organizations that accept money for savings and also loan money for their members.

• Members usually consist of a large number of people that all work for the same employer or group of employers

1. ex. Teacher’s Union

• Higher interest rates on savings and loans

Checks

The first contact with most banking services for most of us is when we are given a check. Checks are a way of transferring money. Checks may be “cashed” at a bank in exchange for money.

Endorsing A Check

• No matter what you want to do with your check, you must endorse it. This means signing your name on the back of the check.

• If you write only your name on the back of the check then it is a blank endorsement and anyone may cash it.

• To restrict what can be done with your check you can use restrictive endorsement.

• A full endorsement is when you write pay to the order of…

Handling Checks

Always make sure that you have enough money in your checking account before writing a check and cash checks promptly to make sure the person who gave you a check has enough money in their account.

Cashing Checks

• Some people write “overdrafts” or writing a check for money you don’t have. This is against the law and the people accepting the checks will lose money.

• If you write a “bad” check then you should pay the amount owed as soon as possible.

• When cashing a check, some people want to make sure that you are cashing a valid check. Some may ask for a driver’s license or proof ID to make sure that your signature matches who you really are.

Paying Bills by Check

Most people carry small amounts of cash for buying little things but when it comes to paying the bills, most Americans use checks.

• It is more economically friendly to put checks in the mail rather than driving around to pay bills.

• Mailing cash is not safe. Pay all out-of-town bills out of town. It is also safer to keep your money in a bank, rather than your house.

• When checks are cashed, they are individually marked. Banks may keep these cancelled checks on file or send them back to you for record.

Checking Accounts

There are many different types of checking accounts. You can open a single account so that only you can use it. Most couples open a joint account so that they can both write checks.

• Some accounts require you to pay a service charge, in some cases a flat fee determined by the minimum balance.

• Other accounts are Activity accounts; this is based on the number of checks written each month. If you don’t write many checks this is not the account for you.

• Another account is the no-service charge. You can write all the checks you want and not have to pay a service charge. You must meet a certain requirement by most banks to qualify for these accounts.

• Some savings and loan accounts allow you to write checks too. These checks are referred to as “NOW” or negotiable order of withdrawal.

• Almost all banks offer automatic teller machines (ATM) services. Using an electronically encoded card and a secret password you may make deposits or withdraw money from your account when the bank is closed or when you’re in another city.

Opening a Checking Account

• To open a checking account you need the following information:

1. Name

2. Address

3. Telephone Number

4. Place of work

5. Amount of deposit

• You will also be asked to sign a signature card, you must sign this exactly how you will sign your checks. Later bank employees will match the signature to make sure that these are valid.

• Checks will be printed with your name and address on them. And for a small fee you will be able to choose the design you want on them. Printing of these checks will take up to a couple weeks.

Making Deposits

• When you deposit money into a checking account you must fill out a deposit slip.

• You must state whether you are depositing a check or cash. If you want to keep some cash from a check you must write the amount of cash you want after the words “less cash received”

• You must sign to acknowledge you received the cash and then the teller or ATM will print you a receipt.

• In the front of your checkbook is a check register. Use this to keep track of the money you spend on checks.

Writing Checks

• Steps to writing checks:

1. Record it in your check register, write the number of the check and name of person or company to whom you are writing the check to.

2. Write the amount of the check in the payment or debit column

3. Subtract the check from previous balance

4. Subtract any charge for writing the check

5. Now you can write the check, but remember to always use a pen!! (

Reconciling the Bank Statement

• Banks return cancelled checks or checks you have written once a month

• Banks return bank statements also

1. Bank statement: a monthly accounting of checking account activity and balance provided by the bank.

• Then to make certain your own records match the bank statement you must reconcile

1. Reconcile: to match the balance in the check register to the bank statement

• This is done in five steps:

1. Sort your cancelled checks in numbered order

2. Make a small checkmark in your check register for each check that has been returned and for each deposit that has been recorded

3. If you have made recent deposits that do not show on the bank statement, add the amount to the banks closing balance.

4. List the numbers and the amounts of checks you have written that have not yet been returned – these are outstanding checks.

5. In check register, list any charges or fees that are not on the bank statement then subtract from your register total.

• If the revised balances do not match, then check addition and subtraction.

Savings Accounts

Passbook Accounts

• When you open a savings account you are issued a passbook to keep record of your savings

• A passbook shows how much you have saved and how much your savings have earned.

• These accounts pay less interest than others, but you are free to withdraw whenever.

Certificates of Deposit

• If you deposit money for a fixed period of time, the bank will usually pay a somewhat higher interest rate. You will be issued a certificate of deposit which is designated for a certain time period.

• You can withdraw money, but you will lose interest, and may also pay a penalty.

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