Money and Banking 2018.ppt

Money and Banking  What is money? 3 pieces of paper and a dollar bill Dollar and a credit card – Which one is money? What is the difference between these two forms of money? the government issued the dollar a ba...

Money and Banking  What is money? 3 pieces of paper and a dollar bill Dollar and a credit card – Which one is money? What is the difference between these two forms of money? the government issued the dollar a bank or credit agency issued the card a dollar is acceptable as payment by nearly everyone credit cards may not always be accepted in an exchange for goods or services the dollar bill represents money you own today credit enables you to use another agency’s money and pay them later  Direct and Indirect Exchange Debriefing Evaluate the usefulness of each way of buying and selling. Ask how many of their three items students were able to buy in each round. Was anyone able to buy all three? Which round was easier? Why?  The Benefits of Money - What are the benefits of money? Potential Consumption - Money offers an incentive for people because it represents potential ownership of things of value. Money makes it easier to trade. Money allows for greater choice, comparing prices, and competition Money allows people to borrow and lend. Money allows people gain wealth through saving and investing. AB Pyramid Review Practice Medium of Exchange Durable Commodity Money Fiat Money Portability Portability Store of Value Uniformity Divisibility Unit of Account Fungible Representative Acceptable Money Specie  AB Pyramid Review Fractional Reserve Credit Union Banking Money Supply Mortgage Three functions of a Demand Deposit bank (Store money, M1 being the most Save money, and liquid form of give out loans) money  How Banks Work How do banks work or make profit? Explain. What other the sources of revenue/income for banks? Define fractional reserve banking  Durability: – Can withstand wear and tear. Medium of Exchange: – Money is used to buy and sell goods and services. Commodity Money: – objects that have value in and of themselves and that are also used as money. Portability: – Easy to carry around. Store of Value: – money maintains it’s value over time. Fungible: – one piece of money is exactly like another  Unit of Account: – measures the value of goods and services through prices. Divisible: – Money must be easily divided into smaller denominations. Representative Money: – objects that have value because the holder can exchange them for something else of value Uniformity: – People must be able to count and measure money accurately. Fiat Money: – objects that have value because a government has decreed that they are an acceptable. Acceptable: – Everyone must accept and trust money has value.  The Mystery of Money Money is truly a mystery This money has no intrinsic (inherent) value. That is, the paper money itself has no value. There is no relationship between the cost of its product and the value or price of money. A $1, $20, and $1,000 bill is required the same amount of labor and material. It cost a few cents to produce money. Anything can be money, if it is accepted as a common medium of exchange, unit of account, and store of value.  The Functions of Money – What does money do? Medium of Exchange: Money is used to buy and sell goods and services. – money is accepted as a method of payment. – anything that is used to trade during the exchange of goods and services How does money develop? Through surpluses, shortages, trade, and marketability – People trade when there are surpluses and shortages. For example, if I produce too much corn (surplus) but have a shortage of green beans, I will naturally want to trade with another farmer who has a surplus green beans but demands corn. – Different goods have different marketability. – Direct Exchange vs. Indirect exchange Barter and money simulation – Debrief.  The Functions of Money – What does money do? Store of Value: money maintains it’s value over time. – If I work today and earn $100, I can hold onto it and spend it at a later day. – This enables saving, lending, and borrowing.  The Functions of Money – What does money do? Unit of Account: measures the value of goods and services through prices. – a means for comparing the value of goods and services. – Money is a unit of accounting or measure. Prices, in money terms, enable people to compare values of goods and services. How do you know how much something is worth? “How many chickens is a bicycle worth?” Imagine that they have no reliable food source at hand. How much would the chickens be worth in that instance? The Characteristics of Money - What makes good money? Durability – Money must be able to withstand the physical wear and tear that comes with being used over and over again. Portability – Money must be easily carried by people. Paper money and coins work because they are small and light. Divisibility – Money must be easily divided into smaller denominations. Uniformity – People must be able to count and measure money accurately. Fungible – one piece of money is exactly like another Acceptable – Everyone in an economy must be able to take the objects that serve as money and exchange them for goods and services.  Where does money get is value? Commodity Money: objects that have value in and of themselves and that are also used as money Representative Money: objects that have value because the holder can exchange them for something else of value – specie: coined money, usually gold or silver, used to back paper money Fiat Money: objects that have value because a government has decreed that they are an acceptable means to pay debts  Homework Choose one of the following types of money used in the past and measure it against the 6 characteristics of “good” money. Salt Tobacco Tea Dolphin teeth Oracle bone (whale bone)  Objectives 1. Explain how the money supply in the United States is measured. 2. Describe the functions of financial institutions. 3. Identify different types of financial institutions. 4. Describe the changes brought about by electronic banking.  Objectives 1. Explain how the money supply in the United States is measured. 2. Describe the functions of financial institutions. 3. Identify different types of financial institutions. 4. Describe the changes brought about by electronic banking.  Key Terms money supply: all the money available in the United States economy liquidity: the ability to be used, or directly converted into, cash demand deposit: money in a checking account that can be paid out “on demand” or at any time money market mutual fund: a fund that pools money from small savers to purchase short-term government and corporate securities  Key Terms, cont. fractional reserve banking: a banking system that keeps only a fraction of its funds on hand and lends out the remainder default: failing to pay back a loan mortgage: a specific type of loan that is used to buy real estate credit card: a card entitling its owner to buy goods and services based on the owner’s promise to pay for those goods and services  Key Terms, cont. interest: the price paid for the use of borrowed money principal: the amount of money borrowed debit card: a card used to withdraw money from a bank account creditor: a person or institution to whom money is owed  Introduction What banking services do financial institutions provide? – Financial institutions: Provide electronic services Issue credit cards Make loans to businesses Provide mortgages to prospective home buyers Manage ATM machines  Functions of Financial Institutions Storing money – They provide a safe place to store money Saving money – They offer people ways to save money through: Savings accounts Checking accounts or demand deposit: money in a checking account that can be paid out “on demand” or at any time. Money market accounts, which allow people to save and write a limited number of checks CDs, which offer a guaranteed rate of interest but cannot be removed until after a specified period of time.  Provide Loans Financial institutions lend money to consumers and charge interest on those loans. Loans help consumers: – Buy homes – Pay for college – Start and grow businesses Many banks loan money to other financial institutions and individuals. A banking system that only keeps a fraction of its funds on hand and lends out the rest is called fractional reserve banking. Mortgages and Credit Cards A mortgage is a specific type of loan that is used to buy real estate. Banks issue credit cards, which entitle their owners to buy goods and services based on the owners promise to pay. – Banks usually charge high interest rates on credit cards.  Simple and Compound Interest Banks pay simple interest only on the principle of a deposit. Compound interest is interest paid on both principal and accumulated interest. – According to the table, after five years, what is the total interest that the deposit-holder will have earned? How Banks Make a Profit  Types of Financial Institutions Commercial Banks – Offer checking accounts, accept deposits, and make loans Savings and Loan Associations – Allow people to save up and borrow enough for their own homes Savings Banks – Owned by depositors who make smaller deposits than a commercial bank would handle Credit Unions – Cooperative lending associations established for particular groups Finance Companies – Make installment loans to consumers  Electronic Banking With the increased importance of computers in today’s world, electronic banking has seen an upsurge. – ATMs allow customers to deposit money, withdraw cash, and obtain information. – Debit cards can be used at an ATM or in a store to purchase goods. These cards require a PIN for security reasons. – Home banking—More and more people use the Internet to check balances, transfer money, automatically deposit paychecks, and pay bills. – Checkpoint: How does a debit card work?  ACHs and Stored-Value Cards Automated Clearing Houses (ACHs) allow consumers to pay bills without writing checks. Stored-value cards carry money on them and can be used by college kids on campus or by people using a phone card with stored minutes.  What’s the Money Term? Maria visited England, Greece, and Zimbabwe. All the while she had money in her purse and carried it around with ease. The pound sterling, England’s currency, has value because the it’s government has decreed it has value. A Clydesdale horse stomped on a $10 but Henry was still able to use it because it withstood wear and tear. Captain Jack Sparrow found Spanish gold bullions (coins) in a cave. I have two $5 bills that look alike.  What’s the Money Term? I asked the bank teller if he could give change for a $10 bill. I received one $5 bill and five $1 bills in change. $10 plus $5 plus $5 equals $20. I paid $7 for combo #5 at Toxic Hell. Salt is this type of money. I made $25 babysitting and will put it in the bank. I will buy dinner next week for my friend’s birthday. I had my heart set on purchasing a trip to Europe for $5000 but it was too costly so you decided not to buy it. Time Value of Money  The Time Value of Money Would you rather have $100 today or $200 in the future?  You can determine the future value of any amount ($X) if you know the interest rate (ir) and the number of years (N) Equation to Calculate Future Value $X in N Years =$X (1 + ir)N If the interest rate is 10% then the future value of $100 is $110. Future Value of $100 in 1 $100 = (1 +.1) = $110 Year What is the present value of $100 in one year if the interest rate is 10%?  Present Value- The current worth of some future amount of money. Equation to Calculate Present Value Present Value $X = of $X in 1 Year (1 + ir)N Present Value of $100 = $100 in 1 = (1 +.1)1 $90.91 Year If the interest rate is 10%, the present value of $100 is $90.91 So, this means that the future value of $90.91 when the interest rate is 10% is $100  Problem 1 Would you rather take $100 now, $109 in one year, or $120 in two years? How Banks Create Money  The Money Multiplier Example: Assume the reserve ratio in the US is 10% You deposit $1000 in the bank The bank must hold $100 (required reserves) The bank lends $900 out to Bob (excess reserves) Bob deposits the $900 in his bank Bob’s bank must hold $90. It loans out $810 to Jill Jill deposits $810 in her bank SO FAR, the initial deposit of $1000 caused the CREATION of another $1710 (Bob’s $900 + Jill’s $810) 1 Money Multiplier = Reserve Requirement (ratio) Example: If the reserve ratio is.20 and the money supply increases 2 Billion dollars. How much the money supply increase?41