Chapter 5: Entreprenuership



Chapter 12: Money and Financial Institutions

Section 12.1 Money and Banking

The Purpose of Money

Money enables people to buy and sell goods and services more easily around the world.

Money is a standard of value and a means of exchange or payment.

Modern society uses coins, currency, checks, and debit cards as part of the monetary system.

The Functions of Money

• Medium of exchange: anything that is generally accepted as a measure of value and of wealth.

• Standard of Value: it measures the value of goods and services

• Store of Value: it holds its value over time and can be stored or saved and build wealth

Characteristics of Money

• Must be stable in value

• Must be scarce to maintain its value

• Must be accepted as a medium of exchange

• Should be divisible into parts

• Should be portable

• Should be durable

• Must be hard to counterfeit

The Functions of Banking (Figure 12.1, p.199)

Storing Money: deposit means putting money in the bank and withdrawal means taking money out. Keeping your money in a bank prevents you from losing it, spending it, or having it stolen easily

Two main types of accounts are checking and savings accounts. Checking accounts are used to store money for the short term while savings accounts are used to store money over a longer period of time. An advantage of a savings account is that you earn interest on your money.

Transferring Money: banks use checks and electronic transfers to move money. Checks are used to transfer money from one party to another while electronic transfers are used to move money from one financial institution to another. Many people now receive their pay via direct deposit, which is an electronic transfer.

Lending Money: this is the primary way banks generate profits. Banks loan out the money the people deposit into bank savings accounts and charge interest for these loans. Most bank loans require some type of collateral as security in case the loan does not get repaid.

There are four main types of loans;

• Mortgage loan is used to buy real estate such as a house or office building

• Commercial loan is a loan made to businesses to buy supplies and equipment

• Individual loan is made to people to buy things such as cars or home repairs

• Line of Credit can be used at any time for any purpose (a credit card is considered a line of credit)

Other Financial Services

• Safe deposit boxes are used to store valuable items such as jewelry and birth certificates.

• Debit cards and Credit cards

• Trust accounts which manage money for individuals and organizations

12.2 Types of Financial Institutions

Banks operate on state, national, and international levels and are governed by strict rules

Commercial Banks: most banks in the U.S. are commercial banks, which offer a full range of banking services and are often called full-service banks. They are granted a charter by either the state or federal government. They make profits by charging more interest on their loans than they pay out on their deposits.

Savings and Loan Associations: they mainly invest in mortgage loans which traditionally have been lower than rates charged by commercial banks and they usually pay higher interest on savings accounts to encourage people to save money and buy homes. In 1982 the government passed new laws, which allowed savings and loans to charge higher rates and offer more services. By the late 1980’s about 20 percent of savings and loan associations went out of business and laws were changed. Now savings and loans are very similar to commercial banks and credit unions.

Credit Unions: these are not-for-profit banks set up by organizations for their customers to use. To use a credit union you must be a member of the organization that created it.

Other Financial Institutions:

• Mortgage companies provide loans specifically for buying a home or business

• Finance companies provide loans to start businesses and usually charge higher interest rates due to the high risk involved in new ventures

• Insurance companies also offer loans to businesses and consumers as well as offer protection from loss of property

• Brokerage firms that sell stocks and bonds may also offer a wide range of financial services to their customers.

The Federal Reserve System aka “The Fed”: the central bank of the United States and is the bankers bank. It monitors the money supply and controls interest rates. The Fed was established in 1913 in order to provide the U.S. with a safe, flexible, and stable monetary and financial system. The Fed consists of 12 regional banks and 25 branch banks and has about 5,000 members. (Figure 12.2, p.204)

The Fed has six functions

• Clearing checks

• Acting as the Federal Governments Fiscal Agent

• Supervising Member Banks

• Regulating the Money Supply

• Setting Reserve Requirements

• Supplying Paper Currency

The current Chair of the Federal Reserve is Janet Yellen[pic]

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download