CH. 24 MONEY & BANKINGStandard EE 2.3, 3.3, PFL 1.5, 1.6

MONEY

• Money has 3 functions• Medium of exchange• Store of value• Measure of value

MONEY

• The American dollar is not based on gold or any other commodity• It’s value is based on the surety that someone will accept its value

(confidence in our government)

FINANCIAL INSTITUTIONS• Financial institutions accept deposits of money (savings/checking

accounts, etc.) and use that money to make loans to others• Debtor must repay the principal plus interest on a pre-arranged schedule

TYPES OF FINANCIAL INSTITUTIONS

• Types of institutions:• Commercial Banks – commercial businesses that offer full banking services to

individuals and businesses• Savings & Loan Associations (S&Ls) – small commercials businesses that take

deposits and issue mortgages• Credit Unions – not-for-profit associations of members that take deposits and

offer loans

FDIC• Federal Deposit Insurance Corporation (FDIC) insures bank accounts for up

to $250,000 (formed after the Great Depression)• Prevents depositors from losing savings when banks fail• Give depositors confidence in banking institutions

THE FED• The Federal Reserve – the nation’s central bank

• Oversees and regulates large commercial banks• Acts as the national government’s bank

• Keeps federal deposits• Sells US Savings Bonds & Treasury Bills• Manages the nation’s currency

$850,000 in new $20 Bills

The Fed Headquarters – Washington DC

MONETARY POLICY

• The Fed also Conduct’s Monetary Policy – government management of the economy through controlling the supply of money & credit• Two major tools:

• Discount rate – rate of interest charged when banks borrow money from the Fed• Reserve Requirement – amount of deposits that banks must keep on hand to

conduct business

MONETARY POLICY• Manipulate the Discount Rate to encourage or discourage banks’

borrowing to make loans to their customers• Higher discount rate causes higher interest rates to decrease borrowing &

spending

MONETARY POLICY• Manipulate the Reserve Requirement to increase or decrease amount

of money in circulation• Higher reserve requirement causes less money to be available to make loans

STOCK MARKET• Investing in the stock market is a way to build wealth, but comes

with a risk• Companies that are publicly traded in the stock market face more

government regulation• Securities and Exchange Commission (SEC) oversees the stock market and

companies that are traded there

SHAREHOLDERS• Investors by shares of a corporation (stocks) and earn profit in two ways:

• Sell stocks at a higher price than they were bought• Earn dividends when company distributes profits to investors• If the stock price drops, shareholders will lose money, but only what they invested

(limited liability)

STOCK INDICES• Stock Indices give a quick view of the value of the stock market

• Dow Jones Industrial Average – index of 30 largest companies traded on the stock market

• NASDAQ – Index of 3,000 technology stocks traded on the stock market