Business a changing world 7e by ferrell chap015

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Business in a
Changing World

Chapter 15

Money and the Financial System

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McGraw-Hill/Irwin

Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights


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Chris Larsen, Founder and
CEO, Prosper.
Prosper’s peer-to-peer lending is unique and
appealing particularly for those with little
collateral or credit history.
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Money in the Financial System

Finance, defined:
The study of money—how it’s made, how it’s

lost, and how it’s managed.
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Money in the Financial System

Money – anything generally accepted in
exchange for goods and services.

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The Functions of Money

Medium of exchange -- Accepted as payment for
products and resources
Measure of value -- Single standard for assigning
and comparing values of products and resources
Store of value -- Means of retaining and
accumulating wealth
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The Characteristics of Money

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Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
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The Characteristics of Money

The Life Expectancy of Paper Currency
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The Characteristics of Money

Skyrocketing copper, zinc, and nickel
prices have led to some members of
Congress to propose that pennies be
made of steel as they were in WWII

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Types of Money

Checking account (demand deposit) – money

stored in an account at a bank that can be
withdrawn without advance notice.

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Types of Money

Savings account (time deposit) – accounts with
funds that usually can’t be withdrawn without
advance notice
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Types of Money

Money market account – higher interest rates
than standard bank rates with greater
restrictions.
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Types of Money

Certificates of deposit (CDs) – savings accounts
that guarantee a set interest rate over a period of
time providing funds are not withdrawn before
maturity.
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Types of Money

Credit cards – means of access to preapproved
lines of credit granted by a bank or finance
company.
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Types of Money

MasterCard & Visa – majority of credit cards held
in the United States. More than ½ the market is
controlled by the “Big Five” (Citigroup, First USA,
American Express, and Discover)
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Types of Money

Debit card – a card that looks like a credit card but
works like a check. A direct electronic payment
from the cardholder’s checking account.
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Types of Money

Traveler’s Checks, Money orders, Cashier’s
checks – other common forms of “near” money.

Guaranteed as “cash.”
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Check Facts
About 13 million US households do not have
checking accounts.
180 million checks are cashed annually in
3,700 check-cashing stores for a value of $55
billion.
85% of checks cashed are payroll checks and
the average check is about $300.
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Federal Reserve System
U.S. Federal Reserve
Board (Fed) Chairman Ben
Bernanke affects
monetary policy across
the globe.

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Federal Reserve System

Federal Reserve Board (the Fed) – guardian of the
American financial system. Independent agency of

the federal government established 1913 to regulate
the nation’s banking and financial industry.
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The Federal Reserve System

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Federal Reserve Board
• Controls the money supply with monetary policy
• Regulates financial institutions
• Manages regional and national check-clearing
procedures
• Supervises the federal deposit insurance of
commercial banks in the Federal Reserve system
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Monetary Policies
Open market operations – decisions to buy or
sell U.S. Treasury bills in the open market
Reserve requirements – percentage of deposits a
bank must hold in reserve.
Discount rate – rate of interest the Fed charges
to loan money to banking institutions
Credit controls – authority to establish and
enforce credit rules
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Fed Tools for Regulating
the Money Supply

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