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Introduction to Business 2
Slide 2 of 65
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.3. 3. Name the types of banks.4. Identify the functions of the Federal
Reserve System.
Introduction to Business 3
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Why it’s ImportantUnderstanding the way money and financial
institutions work is crucial to understanding the economy.
Introduction to Business 4
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The History of Money
1. In the _____________ goods and services are indirectly exchanged using money, which can then be ________________________________.
monetary system
exchanged for other goods and services
Introduction to Business 5
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The History of Money 2. Money can be _____________ that people
___________________ for payment.
3. In other times and places people have used shells, stones, corn, parrot feathers, and even gopher tails for money.
anythingaccept as a standard
Introduction to Business 6
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Figure12.1 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 7
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The Functions of Money4. The three basic functions of money are:
It is a medium of exchange It is a standard of value It is a store of value
Introduction to Business 8
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Characteristics of Money
5. For money to carry out its functions, it must have several characteristics. Money must be: Stable in value Scarce Accepted Divisible into parts Portable and durable
Introduction to Business 9
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Graphic OrganizerFunctions and Characteristics of MoneyFunctions and Characteristics of Money
Graphic OrganizerGraphic Organizer
FUNCTIONS
• Medium of exchange• Standard of value• Store of value
CHARACTERISTICS• Stable• Scarce• Accepted• Divisible• Portable• Durable
Introduction to Business 10
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Fast Review
1. What is the monetary system?
2. How is money a standard of value?
Goods and services are exchanged indirectly using money, which can then be exchanged indirectly using money,, which can then be exchanged for other goods and services.
It is used as a fixed means of measuring and comparing the values of different goods and services.
Introduction to Business 11
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Fast Review
3. What are some of the characteristics money must have to be useful?
Acceptability, portability, durability, divisibility, stability, difficult to counterfeit
Introduction to Business 12
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Banking
6. The ________________ is the main type of financial institution, or organization for ________________, in our economy.
banking system
managing money
Introduction to Business 13
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.
Storing Money7. A ______________ is a record of how much
money a customer has ____________________________.
8. The money put in a bank is called a _____________.
9. The money taken out of a bank is called a ________________.
bank account
put into or taken out of a bank
deposit
withdrawal
Introduction to Business 14
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.
Storing Money10. __________________ are used for storing
money in the _____________ so you can draw on it easily if you want to go shopping or pay a bill
11. ______________ accounts are used for storing money over a _____________ of time.
Checking accountsshort term
Savingslong period
Introduction to Business 15
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.
Storing Money12. _____________is a rate the
_________________________________.
If a bank pays you 5 percent interest per year on a $1,000 savings account, you’ll have earned $50 after one year
Interestbank pays you for keeping your money there
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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
Understanding InterestBusiness Building BlocksBusiness Building Blocks
Introduction to Business 17
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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
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
Introduction to Business 18
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Step 1. Convert the interest rate percent to its decimal equivalent.
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
(10% = 10/100 = .10)Interest Rates are always stated per year
Introduction to Business 19
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Step 2. Use this formula:
interest = principal x interest rate x timeOR
I=PRT
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
Introduction to Business 20
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Principal
continued
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
Decimal Interest
RateTime Interest=xx
$1,000 x .10 x 3 = $300
Introduction to Business 21
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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.
How to Compute InterestBusiness Building BlocksBusiness Building Blocks
Introduction to Business 22
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Transferring Money13. Banks make it easy to ________ money
from one person or business to another. 14. Today more banks are using
_______________________ (EFT) to move money around.
15. With EFT, money is transferred from one account to another ________________________________.
transfer
electronic funds transfers
through a network of computers.
Introduction to Business 23
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Lending Money16. The money you deposit in a bank makes
it possible for the ________________________________.
17. Most bank loans require some form of ______________.
18. Collateral ______________________ ______________________.
bank to lend money to other customers
collateral
something valuable you put up for a loan
Introduction to Business 24
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Lending Money19. The four main types of loans that banks
offer are: A mortgage loan A commercial loan An individual loan A line of credit
Introduction to Business 25
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Mortgage20. A mortgage ___________________ ______________________________ ______________________________
is a deed to give the property to the lender if the loan is not paid back.
Introduction to Business 26
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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?
Introduction to Business 27
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Other Financial Services21. Many banks provide _____________ on
managing and investing your money.
22. You can also store valuable items, such as jewelry and certificates, in _________________________.
financial advice
safety-deposit boxes
Introduction to Business 28
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Other Financial Services23. Many banks offer ______________.
24. Banks also _________________, such as an inheritance.
credit cards
manage trust funds
Introduction to Business 29
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Figure12.2 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?
Introduction to Business 30
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Fast Review
1. What are the three main functions of a bank?
2. How does an EFT work?
Introduction to Business 31
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Fast Review
3. What are the types of loans a bank offers?
Introduction to Business 32
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Commercial Banks25. __________________ offer a full range of
services such as checking and savings accounts, loans, and financial advice. They are often called _________________.
Commercial banks
full-service banks
Introduction to Business 33
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Commercial Banks26. To make a ____________, commercial
banks usually_______________________ _________________ than the interest they
pay on savings accounts.
profit charge much more interest on the money they lend
Introduction to Business 34
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Savings and Loan Associations27. Savings and loan associations were
originally set up to ________________________________.
28. The purpose of the savings and loan associations was to encourage people to _______________ and make it easier to buy a home or start a business.
savings accounts and home mortgage loans
save money
Introduction to Business 35
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Savings and Loan Associations29. Savings and loan associations
__________________________________________________________________.
30. In the 1980s about _____________ of savings and loans failed.
charge lower interest on loans and paid higher interest on savings
20 percent
Introduction to Business 36
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Saving and Loan Associations31. The government __________________
allowing savings and loan associations to charge higher interest rates and offer more services like credit cards.
passed new regulations
Introduction to Business 37
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Credit Unions32. ____________ are nonprofit banks set up by
organizations for their members to use. 33. Credit unions offer ____________________________,
including credit cards, checking accounts, and loans.
34. Credit unions _____________________ and pay high interest rates on savings accounts.
Credit Unions
members a full range of services
offer low-interest loans
Introduction to Business 38
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Other Financial Institutions35. ___________________ provide loans
specifically for buying a home or business.
36. __________________ offer short-term loans to businesses.
Mortgage companies
Finance companies
Introduction to Business 39
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Other Financial Institutions37. ___________________ not only provide
protection against things like fire and theft, but also offer loans to businesses.
38. ________________ that sell stocks and
bonds may also offer a wide range of financial services to its customers.
Insurance companies
Brokerage firms
Introduction to Business 40
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Fast Review
1. What are the types of banks?
2. How is a credit union different from a commercial bank?
Introduction to Business 41
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Fast Review
3. Name some financial institutions other than banks that offer similar services.
Introduction to Business 42
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The Federal Reserve System39. The __________________ (or Fed) is the
________________________ in the United States.
40. Congress set up the Fed in 1913 _____________________________ that occurred during the 1800s and early 1900s.
41. The Fed consists of _____ Federal Reserve district banks, _______ branch banks, and about _____ member banks.
Federal Reserve Systemcentral banking organization
to end the periodic financial panics
1225
5,000
Introduction to Business 43
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Functions of the Fed42. The six functions of the Fed are:
Clearing checks Acting as the federal government’s fiscal
agent Supervising member banks Regulating the money supply Setting reserve requirements Supplying paper currency
Introduction to Business 45
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Fast Review
1. What is the Fed?
2. Name the six functions of the Fed.
Introduction to Business 47
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With a 20 percent reserve requirement, if a bank lends out $1,000 how much money must it hold in reserve?
continued
Introduction to Business 48
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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
Introduction to Business 50
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Key WordsKey Words
monetary systemmoneyfinancial institutionbank accountdepositwithdrawalinterest continued
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Key WordsKey Words
electronic funds transfer (EFT)collateralmortgagesafety-deposit boxFederal Reserve System