Money and Banking Managing Financial Resources Exploring Business Chapter 13 Thursday 9/6/11.

Money and BankingMoney and BankingManaging Financial ResourcesManaging Financial Resources

Exploring BusinessChapter 13

Thursday 9/6/11

EconomicsEconomics

Macro Economics - Study of the economy as a Study of the economy as a wholewhole

Exploring Business © 2009 FlatWorld Knowledge

13-3

Bartering v. MoneyBartering v. Money

BarteringBartering

Trade StuffTrade StuffFor StuffFor Stuff

Difficult ToDifficult ToDetermine ValueDetermine Value

Stuff Cannot Stuff Cannot Always Be SavedAlways Be Saved

DivisibleDivisiblePortablePortableDurableDurable

Hard to CounterfeitHard to Counterfeit

Easy To Easy To State PriceState Price

Stores ValueStores Value

Money Money

The Functions of MoneyThe Functions of Money

What Three Basic Functions Does Money Serve?

Functions of MoneyFunctions of Money

Medium of Exchange

Measure of Value

Store of Value

Money Supply

What are the Two Primary Measures of theMoney Supply?

Money Supply

Measures: M- 1

M - 2

How much M – 1 is there?

What is M-1 comprised of?

M–1 Measures

M-1 was about $1.6 trillion dollars in 2008

Composition All currency in circulation All “checkable deposits”

It’s the Narrowest measure of money supply Includes the most Liquid forms of money

What does Liquid mean?

M–1

Liquid = cash checking accounts, etc.

When the press refers to the Money Supply growing, it’s referring to M – 1

What’s the percentage breakdown of M-1 between currency and demand deposits?

M – 1 Currency Breakdown

25% of Currency is in Circulation

75% of Money is in Demand Deposits*

*Note: ONLY demand deposits are subject To the Multiplier Effect.

What Does M–2 Measure?

Money Supply

Money Supply

M – 2 = Everyting in M-1 plus near-cash items invested for the short

term like savings accounts, time deposits below $100,000, [non-negotiable bank CDs], and money market mutual funds.

M – 2 is a much broader money definition than M-1


13-13U.S. Money SupplyU.S. Money Supply


13-14

““Plastic MoneyPlastic Money””

1)1) Not Spending MoneyNot Spending Money

2)2) Buy-Now-Pay-Later = Loan Buy-Now-Pay-Later = Loan [high interest][high interest]

3)3) Money = Bill PaidMoney = Bill Paid

Financial Institutions

What are Three Types of Depository Institutions?

Depository Institutions

Commercial Banks – Lends funds to commercial Customers and provide a variety of services.

Can you name some of the services a commercial bank provides?


13-17

Services Offered By BanksServices Offered By Banks

Checking/Savings AccountsChecking/Savings Accounts ATMsATMs Credit/Debit CardsCredit/Debit Cards LoansLoans Financial AdviceFinancial Advice Sells Financial ProductsSells Financial Products InsuranceInsurance Electronic BankingElectronic Banking


Savings Banks – called “thrifts” and S&Ls.Set up to provide mortgages and encourage savings


Credit Unions – provide member-only services


In which Depository Institution is most of our money deposited? Approximately what percent of Total Deposits does that bank represent?


13-21Where OurWhere OurMoney Is DepositedMoney Is Deposited

80/20 Rule and Its Antithesis [20/80 Rule]

1) Basic Rule is a Truism in Commercial & Industrial Sales:

80% of your sales comes from 20% of your customer base.

Mr. “Ks” Career Observation:2) Antithesis Rule: Truism in the Labor Force:

20% of your employees have the positiveattitude, motivation, drive, and exampleto help a company succeed. The problem isfinding the 20%ers

Financial Institutions

What are Three Types of Non-Depository Institutions?

Non-Depository Institutions

Finance Companies – Non-deposit financialinstitution that makes loans from funds acquired by selling securities or borrowingfrom Commercial Banks


Insurance Companies – non-deposit institution that collects premiums from policyholders forprotedction against losses and invests thesefunds


Brokerage Firms – financial institutions that buyand sell stocks [equities], bonds [debt instruments], and other investments for their clients.


13-27

Bank RegulationBank Regulation

Federal Depository Insurance Federal Depository Insurance CorporationCorporation

•19331933

• Insures Deposits ($100,000)Insures Deposits ($100,000)

•Periodic ExaminationsPeriodic Examinations

Office of Thrift SupervisionOffice of Thrift Supervision

National Credit Union AdministrationNational Credit Union Administration

Federal Reserve System

1. What kind of bank is it?2. Where is it headquartered3. Who is its current Chairman4. How many regional Federal Reserve banks are there in the US?5. What are its principal duties?

Federal Reserve System

1. What kind of bank is it? Central bank2. Where is it headquartered? Washington DC3. Who is its current Chairman? Ben Bernanke4. How many regional Federal Reserve banks are there in the US? 125. What are its principal duties?

Conduct the nations monetary policySupervise & regulate banksMaintain stability of the financial systemProvide financial services to depository institutions

The Federal Reserve SystemThe Federal Reserve System

What are the Three Fundamental Goals of the Federal Reserve?

Federal Reserve

Goals of the Federal Reserve

Price Stability

Sustainable Economic Growth

Full Employment

Federal Reserve

1. Fed seeks to Stabilize Prices by regulating the money supply and interest rates

2. Theoretically, Stable Prices promote Economic Growth and Full Employment

How does the FED marry its Goals with its Monetary Policy?

What are the Three Tools the FED usesTo Conduct Monetary Policy?

Federal Reserve

The FED’s Monetary Policy

Set Reserve Requirements

For Whom?

The Fed’s Monetary Policy:A Tool to Control Money Supply

1. Assume the RR for the Banks is 10%. The Bank must keep 10% of deposits on reserve and can lend the other 90%.

In theory, $1 deposited in a Bank with a 10% RR results in the creation of another $10 in credit through the “multiplier effect” [$1/0.1 = $10].

If the FED wanted to tighten credit, what action might it take?

Reserve Requirements [RR] and the Bank Multiplier Effect

The FED would raise the RR.

In an exaggerated example, if the FED raised the RR from 10% to 15%, because of the “multiplier effect”, $1 deposited in the bank would now result in the creation of $6.67 in credit [$1/0.15 = $6.67]


13-38The Effect of the Money The Effect of the Money MultiplierMultiplier

Banks Deposit RR Lending Amount

1 $10,000 $1,000 $9,000

2 $9,000 $900 $8,100

3 $8,100 $810 $7,290

Assume 10% RR

The Fed’s Monetary Policy:A Second Tool to Control Money Supply

The Discount Rate – the interest rate that the FED charges member banks to borrow reserves.

Fed’s Impact on Interest Rates

Fed Funds Rate – rate of interst member banks charge each other for overnight loans. Lowest rate currently fluctuating between 0.00 % and 0.25%

Discount Rate – rate at which member banks can borrow from Fed. Generally 1% higher than FFR. Currently at 0.75%

Prime Rate – Rate at which banks make unsecured loans to their best commercial customers. It is the most widely used benchmarks in setting home equity lines of credit and credit card rates. Currently 3.25%


13-41

Key Interest RatesKey Interest Rates

The Fed’s Monetary Policy:A Third Tool to Control Money Supply

Open Market Operations – The FED adjusts creditavailability through the sale and purchase of US government bonds in the “open market” [primarily commercial banks].

When a member bank uses cash to buy US Government bonds:1)What happens to their reserve balances? 2)What happens to the economy as a Whole? 3)During what economic cycle might you employ this strategy?

Federal Reserve

When a member bank uses cash to buy US Government bonds, the FED takes potential reserve money out of circulation. This meansless money to lend and less of a MultiplierEffect.

This action tends to slow the economy downand would be used during inflationary cycles

Federal Reserve

Mr. “Ks” Observation:

Fact: There is nothing backing the US currency other than the “faith” and confidence ofthe people in the Store of Value.

The FED can print money at its discretion[e.g, its Quantitative Easing program – QE1 and QE2], which is, in effect, a hidden inflation. I’m not against central banking – I’m against our currency not backed bysome tangible value [gold, platinum, etc.]

Money and Banking Managing Financial Resources Exploring Business Chapter 13 Thursday 9/6/11.

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