Chapter 10

1. Chapter 10 Section 3: Banking Today

2. Measuring the Money Supply • The money supply is all the money available in the U.S. economy. • M1 • Represents money that people can gain access to easily & immediately to pay for goods & services

3. Consists of assets that have liquidity, or the ability to be used as, or easily converted into, cash. • Includes all currency, traveler’s checks, & demand deposits (money in checking accounts)

4. M2 • Consists of all of the assets in M1, plus deposits in savings accounts & money market mutual funds • A money market mutual fund is a fund that pools money from small investors to purchase government or corporate bonds. • Near money

5. Function of Financial Institutions • Banks are essential to managing the money supply • Banks perform many functions and offer a wide range of services to consumers. • Storing Money • Provide a safe, convenient place for people to store their money. • Keep cash in fire proof vaults & are insured against the loss of money in the event of a robbery

6. Credit Cards • Banks issue credit cards — cards entitling their holder to buy goods and services based on each holder's promise to pay.

7. Saving money • Four of the most common options banks offer for saving money are: • Savings Accounts • Pay a small amount of interest at an annual rate • Checking Accounts • Useful for people who need to make frequent withdrawals

8. Money Market Accounts • Allow you to save & to write a limited number of checks • Certificates of Deposit (CDs) • Offer a guaranteed rate of interest over a certain period of time • Funds cannot be removed until the end of a certain period of time • If you remove the money before that time, you pay a penalty

9. Loans • Fractional reserve banking- keeping only a fraction of funds on hand & lending out the remainder • The more banking money a bank lends out, the higher the interest rate it charges to borrowers, the more profit a bank is able to make • By making loans, banks help new businesses get started, & they help established businesses grow.

10. Businesses can in turn create new jobs by hiring workers or investing in physical capital • May also help other businesses grow • Bankers must consider the security of the loans they make

11. Mortgages • Specific type of loan that is used to purchase real estate.

12. Simple & Compound Interest • Interest- price paid for the use of borrowed money • Amount borrowed is the principal • Simple interest is only paid on the principal • Compound interest is paid on both the principal & accumulated interest

13. How Banks Make a Profit Money leaves bank Money enters bank Interest and withdrawals to customers Deposits from customers Money loaned to borrowers: • business loans •home mortgages • personal loans BANK Interest from borrowers Fees for services Bank’s cost of doing business: • salaries • taxes • other costs Bank retains required reserves Banks & Profit • Largest source of income for banks is the interest they receive from customers who have taken loans.

14. Types of Financial Institutions • Commercial Banks • Traditionally provided services to businesses • Offer checking services, accept deposits, and make loans. • Some are chartered by states & regulated by state authorities & the FDIC

15. 1/3 are national banks & part of the FED • Provide the most services & play the largest role in the economy of any type of bank

16. Savings & Loan Associations • Originally chartered to lend money for home-building in the mid-1800s. • Members deposited funds into a large general fund & then borrowed enough money to buy their own houses • Also called thrifts because they originally enabled “thrifty” working class people to save up & borrow enough to buy their own homes

17. Savings Banks • Mutual Savings Banks (MSBs) originated in the early 1800s to serve people who made smaller deposits & transactions than commercial banks wished to handle. • Owned by the depositors themselves, who shared in any profits • Later, many began to sell stock to raise additional capital • Became savings banks because depositors no longer owned them

18. Credit Unions • Cooperative lending associations for particular groups, usually employees of a specific firm or government agency. • Fairly small & specialization in home mortgages & car loans usually at lower interest rates favorable to members • Some also provide checking accounts

19. Finance Companies • Make installment loans to consumers • These loans spread the cost of major purchases over a number of months • Because people who borrow, fail to repay loans, they generally charge higher interest rates than banks

20. Electronic Banking • The role of computers in banking has increased dramatically. • Automated Teller Machines (ATMs) • Used to deposit money, withdraw cash, and obtain account information at your convenience

21. Debit Cards • Used to withdraw money at an ATM or in stores directly from your checking account • Must use a PIN to authorize purchase

22. Home Banking • Many banks allow customers to check account balances, pay bills, automatically deposit their paychecks, & make transfers via computer

23. Automatic Clearing Houses (ACHs) • Located at Federal Reserve Banks & their branches, allows customers to pay bills without writing checks • Transfers funds automatically from customers' accounts to creditors' accounts • Used to pay regular monthly bills • Saves time & postage & any worries about forgetting to make a payment

24. Stored Value Cards • “smart cards” are embedded with magnetic strips or computer chips with account balance information. • Similar to debit cards • Examples • College Students IDs to pay for food, photo copying, etc • Phone cards