MONEY & BANKING

1. MONEY & BANKING Mr. Roseman

2. Money WHAT GIVES MONEY ITS VALUE?! • Functions of Money: • a medium of exchange • able to trade it for goods/services • a store of value • a measure of value • Types of Money: • anything people are willing to accept in exchange for goods • Currency = • 1. coins • 2. paper money We have faith in it!

3. Forms of Currency

4. BANKING • banks bring savers (sellers) & borrowers (buyers) together • savers = deposits • borrowers = loans • banks are businesses  have profit motive! • How do banks make profit? • banking fees & interest on loans

5. What banks do • 1. ACCEPT DEPOSITS 2. MAKE LOANS • 1. ACCEPT DEPOSITS  use deposits to make loans! • checking accounts: • pay bills/transfer $ • no interest earned • short-term • savings accounts • interest earned • savings grows w/time • long-term • certificates of deposit (CDs) • customer loans $ to the bank for certain amount of time • ex. 1 year CD deposit of $1000 at 4% interest. • earns higher interest rate • penalty for early withdrawal

6. What banks Do (cont.) • 2. MAKE LOANS • loan • an agreement for borrowing money with repayment plus interest • banks make profit from interest paid on loan • loan terminology: • “the principle” = the amount borrowed • “interest” = the cost of borrowing • “interest rate” = the rate of cost to borrow • “fixed rate loan” = interest rate on loan cannot change • “variable rate loan” = interest rate on loan changes • Banks can increase the money supply by making loans. • fractional reserve banking (aka “making money out of this air!”) • Let’s see how this works! YAY!

7. TYPES OF BANKS • 1. Commercial Banks • 2. Savings & Loan Associations • 3. Credit Unions

8. A Brief History of Banks • Bank of the United States, 1791 & 1816 • went out of business • state & private banks were left with great freedom • Federal Reserve, 1913 • “Panic of 1907” prompted its creation • Great Depression • banks bankrupt  lost customers’ savings • banks now heavily regulated as a result • FDIC (Federal Deposit Insurance Corporation) established, 1933 • gov’t corporation • insures individual accounts in banks up to $100,000 • depositor’s savings safe if bank fails • Savings & Loan Crisis, 1980s

9. CHARGE ACCOUNTS & CREDIT • charge account: buy goods/services at individual businesses, but pay later • credit limit: the maximum amount that you can buy with the promise of later payment • 3 kinds of charge accounts • 1. installment account • repaid w/equal payments over certain period • ex. car loan • 2. regular account • billing cycle where bill is sent at the end • interest charged if balance not paid • ex. furniture store • 3. revolving account • billing cycle where bill is sent at the end • interest charged on portion not paid • account can still be used until credit limit reached • ex. credit card

10. CREDIT (Cont.) • credit cards: make purchases without cash • Receive an automatic loan • Charge high interest loans (usually 18% to 24%) • Lower interest rate if customer “reliable” • credit cards are NOT debit cards! • How do I apply for credit? • Must be 18 • Fill out application  credit bureau does a credit check • Credit check shows your income, debt, & ability to pay past debts • Rating of risk: Excellent, Good, Average, Poor • Rating has number associated with it • Gives lenders an idea of your reliability • Higher credit score = less interest you’re charged • HOW DO YOU ESTABLISH GOOD CREDIT?!