Money and Banking Managing Financial Resources Exploring Business Chapter 13 Thursday 9/6/11.
-
Upload
edith-strickland -
Category
Documents
-
view
213 -
download
1
Transcript of 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
Exploring Business © 2009 FlatWorld Knowledge
13-13U.S. Money SupplyU.S. Money Supply
Exploring Business © 2009 FlatWorld Knowledge
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?
Exploring Business © 2009 FlatWorld Knowledge
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
Depository Institutions
Savings Banks – called “thrifts” and S&Ls.Set up to provide mortgages and encourage savings
Depository Institutions
Credit Unions – provide member-only services
Depository Institutions
In which Depository Institution is most of our money deposited? Approximately what percent of Total Deposits does that bank represent?
Exploring Business © 2009 FlatWorld Knowledge
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
Non-Depository Institutions
Insurance Companies – non-deposit institution that collects premiums from policyholders forprotedction against losses and invests thesefunds
Non-Depository Institutions
Brokerage Firms – financial institutions that buyand sell stocks [equities], bonds [debt instruments], and other investments for their clients.
Exploring Business © 2009 FlatWorld Knowledge
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]
Exploring Business © 2009 FlatWorld Knowledge
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%
Exploring Business © 2009 FlatWorld Knowledge
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.]