1. Money Serves the needs of individuals in societies Anything that serves as a medium of exchange, a unit of account, and a store of value

Transcription

1 1 Chapter 10 Money and Banking 1. Money 2. The History of American Banking 3. Banking Today 1. Money Serves the needs of individuals in societies Anything that serves as a medium of exchange, a unit of account, and a store of value The Three Uses of Money Medium of Exchange-used to determine value during the exchange of goods and services Unit of Account-comparing the values of goods and services Store of Value-keeps its value if its stored rather than spent Six Characteristics of Money Durability Portability Divisibility Uniformity Limited Supply Acceptability Sources of Money s Value Commodity Money objects that have value and are used as money Representative Money-objects that have value because the holder can exchange them for something of value Flat Money-objects that have value because government has decreed that they are an acceptable means of paying debt 2. History of American Banking Bank-an institute for receiving, keeping, and lending money American Banking Pre Civil War Two Views of Banking Anti Federalists and The Federalist National Bank- a bank chartered by the federal government The First Bank of the United States Chaos in American Banking The Second Bank of the United States

2 2 The Free Banking Era-led to first Depression Stability in the Later 1800 s Currency in the North and the South official name was demanded notes, but people called it greenbacks. National Banking Acts of 1863 and 1864 The Gold Standard-a monetary system in which our money is backed by gold Banking in the Early 1900 s The Federal Reserve System-first centralized bank, or bank that can lend money to other banks in time of need Member Banks-belongs to the Federal Reserve Banking one result of the Great Depression Two Crises For Banking The Saving and Loans Crisis-Deregulation or to remove restrictions on several industries that had ties to a class of banks known as S & L long term loans at low rates In 2006, problems in the U.S. banking industries began to threaten the housing market and quickly spiraled us into a full-fledge crisis Foreclosures a seizure of property from borrowers who are unable to repay their loans 3. Banking Today The Age of Electronic Banking Good or Bad!!! Measuring the Money Supply Money Supply all the money available in the U.S. Economy M1-money that people can gain access to easily and immediately to pay for goods and services Liquidity-the ability to be used as cash Demand deposit-money in checking account can be used on demand M2-all assets in M1 plus several additional assets (cant use directly) Mutual funds-fund that pools money from small savers to purchase short-term government and corporate securities Functions of Financial Institutions Storing Money-safe place for money Saving Money-saving, checking, CD s Loans-personal, car, home improvements Mortgages-loan to buy real estate Credit Cards-buy goods and services and promise to pay it back with interest Simple and Compound Interest

3 3 Banks and Profits Types of Financial Institutions Commercial Banks-FDIC Saving and Loans Associations-mostly homes Savings Banks-small transaction banks Credit Unions-cooperative lending associates Finance Companies-installment loans to consumers Electronic Banking Automated Telling Machines ATM s and Service Fees Debit Cards-a card to withdraw money with Home Banking-Internet to conduct banking Automated Clearing Houses Stored-Valued Cards-college students Chapter 11 Financial Markets 1. Savings and Investing 2. Bonds and Financial Assets 3. The Stock Market 1. Savings and Investing What is your investment? Right now! Investing and Free Enterprise Investing- the act of redirecting resources from being consumed today so that it may create benefits in the future The Financial System The network of structures and mechanisms that allow the transfer of money between savers and borrowers Financial Assets a claim on the property or income of a borrower Financial Intermediaries Helps channel funds from savers to borrowers Banks, Savings and Loans, Credit Unions Mutual Funds-organization that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets Hedge fund private investment that employs risky strategies Life insurance companies-financial protection to families Pension Funds-money received after retirement

4 4 Sharing Risk and Providing Information Diversification spreading out investments Portfolios-a collection of financial assets Prospectus investment report provides information to potential investors Liquidity, Return, and Risk Liquidity-ability to use cash Return the money an investor receives beyond the sum of invested Risk higher risks greater chance of failure or success 2. Bonds and other Financial Assets Why are bonds bought and sold? Helps the government finance big projects As Financial Assets-Three components Coupon Rate the interest rate that a bond issuer will pay to the bondholder Maturity the time at which payment to a bondholder is due Par Value- bond s stated value, to be paid at maturity (Yield-the annual rate of return on a bond if held until maturity) Types of Bonds Savings Bonds-low denomination bond issued by federal government Treasury Bonds-offer different lengths of maturity Municipal Bonds-state or local government to finance a public project Corporate Bonds issued by a corporation to help raise money for expansion Junk Bonds-high risk and potential high yield Other Types Certificate of Deposits (CDS) most common form low risk Money Market Mutual Funds medium risk (not covered by FDIC) Financial Asset Markets Capital Markets- money is lent for periods longer than a year Money Markets money is lent for less than a year Primary Markets selling financial assets that can be redeemed only by the original holder Secondary Markets reselling financial assets 3. The Stock Market Let s Play the Stock Game!

5 5 Buying Stock Shares a portion of stocks Benefits of Stocks Dividends Capital Gains-financial gain; purchase price is higher than the selling price Types of Stocks Income Stock- provides investors with income Growth Stock-pays a few dividends Common Stock involved in voting Preferred Stock-get dividends back before common, but non voting How Stocks Are Traded Stockbrokers person who links buyers and sellers in stock Brokerage firms a business that specializes in trading stocks Stock Exchange a market for buying and selling stock (New York Stock Exchange and Nasdaq) Futures and Options Futures contract to buy or sell commodities at a particular date in the future at a price specified today Options contracts that give investors the right to buy and sell stock and other assets Call Option buy stock at a price until a specified future date Put Option sell stock at a price until a specified future date Measuring Stock Performance Bull Market steady rise in the market Bear Market steady drop in the market The Great Crash Speculation practice of making high risk investments with borrowed money in hopes of getting a big return October 29, 1928 Black Tuesday 16.4 million shares sold starting the Great Depression Attitudes towards stock changed and many peoples felt it was too risky

6 6 Chapter 12 Gross Domestic Product and Growth 1. Gross Domestic Product 2. Business Cycles 3. Economic Growth National Income Accounting System to collect and organize macroeconomic statistics on production, income, investment, and savings Under the Department of Commerce 1. Gross Domestic Product Dollar Value - cash value of all goods and services Final Goods and Services - All goods/services offered to consumers Within a Country s border - American and foreign within U.S. tracks the exchange of money Calculated Two Ways Expenditure Approach-what we spend Consumer, business, and government goods and services as well as net exports Durable goods - goods that last awhile Non durable goods- short period of time Income Approach-what we make firm sells a product or service, the selling price minus the dollar value of goods/services In theory, they should give us same total Nominal Versus Real GDP Nominal - GDP measured in current prices Real - GDP measured in constant, unchanging prices Limitations of GDP Non-market activities -wash car, mow lawn The Underground economy - black market Negative Externalities - power plants polluting Quality of Life - leisure time Other Output and Income Measures Gross National Product - the annual income earned by a nation s firm and citizens Does not account for depreciation - loss of the value or a good

7 7 Influences on GDP Price Level- the average of all prices Aggregate Supply - total amount of all goods and services in the economy available at all price levels Aggregate Demand - the total amount of all goods and services in the economy that will be purchased at all possible price levels Equilibrium Aggregate Supply /Demand 2. Business Cycles A periods of macroeconomic expansion followed by one of contraction Phases of Business Cycles Expansion - economic growth measured by by rise in GDP economic growth - long term increase peak - the height of economic growth Contraction - economic decline marked by a fall in GDP trough - the lowest point recession - prolonged economic contraction depression - recession that is long and severe Stagflation - decline in real GDP - combined with rise in the price level What Keeps a Business Going Business Investments Interest Rates and Credit Consumer Expectations External Shocks Business Cycle Forecasting Prediction is quite difficult Leading indicators - set of key economic variables that economists use to predict future market trends stock market the Conference Board Business Cycles throughout history The Great Depression - the U.S. stock market crash in 1929 John Maynard Keynes - Theory of Employment, Interest, and Money -the government should intervene to pull an economy out of the market Some later recessions 1970 s OPEC - oil market shortage 1980 s recession - high interest rates brief recession - unemployment

8 8 3. Economic Growth Economic rise in the nation Measuring Economic Growth Real GDP per capita - real GDP divided by the total population of a country Capital Deepening - increasing the amount of capital per worker Savings and Investments - income not used for consumption Population, Government and Foreign Trade Population Growth - leads to lower standards Government - raising taxes to pay for government services, households will have less money but will have more services Foreign Trade - trade deficit - importing more than exporting Technological Progress An increase in efficiency gained by producing more output without using more inputs Causes scientific research innovation The Government aids innovation Chapter 13 Economic Challenges 1. Unemployment 2. Inflation 3. Poverty 1. Unemployment The number of people that are out of work Types of Unemployment Frictional - people take time to look for a job Structural - when workers skills do not match those needed for the jobs available Seasonal - occurs as a result of the seasons Cyclical - rises during good times, falls during bad times

9 9 Measuring Employment Unemployment rate - percentage of the nation s labor force that is unemployed Full Employment The level of employment reached when there is no cyclical unemployment Underemployment Working at a job for which one is over-qualified or working part time when full time is desired Discouraged Employment Someone who wants a job but has given up and relies on family and friends ( I hope they have them) - leads to homeless 2. Inflation General increase in prices across an economy The Effects of Rising Prices Inflation -rising prices Purchasing power - ability to purchase goods and services As prices rise, purchasing power decreases Price Indexes A measurement that shows how the average price of a standard group of goods changes over time Consumer Price Index - price index determined by measuring the price of a standard group of goods meant to represent the... market basket -collection of goods and services inflation rate - percentage rate change in price level over time Inflation Rate percentage rate change in price level over time Types of inflation core inflation rate - rate of inflation excluding the effects of foods and the energy prices hyperinflation-inflation out of control Causes of Inflation Growth of the money supply changes in aggregate demand changes in aggregate supply

10 10 Effects of Inflation Effects on Purchasing Power Effects on Income Effects on interest rates 3. Poverty The income level below which income is insufficient to support a family or a household The Poverty Rate The percentage of people who live in households with income below the official poverty threshold Poverty rates differ among groups race and ethnic origin type of family age residence Causes of Poverty Shift in Family Structure Location Racial and Gender Discrimination Growth of Low-Skill Service Jobs Lack of Education Income Distribution The way in which a nation s total income is distributed among its population Income inequality - food stamp program - government program that helps low-income recipients to buy food Lorenz Curve - the curve that illustrates income distribution Antipoverty Policies The Earned Income Tax Credit Enterprise Zones - area where businesses can locate free of certain taxes and restrictions Employment Assistance Housing Assistance Welfare Reform block grants - federal gov t giving lump sum of money to a state workfare - requires work in exchange for temporary assistance from the government

11 11 Chapter 14 Taxes and Government Spending 1. What are Taxes? 2. Federal Taxes 3. Federal Spending 4. States and Local Taxes and Spending 1. What are Taxes Required payments to a local, state, or national government The Government s Authority to Tax The Purpose of Taxation - gives the government money to function reserves - the income received by a government for taxes and other non tax sources The Constitution grants the government the power to tax, but it spells out specific conditions on the limits of taxation Tax Structures Progressive Taxes - a tax for which the percentage of income paid in taxes increases as income increases Proportional Taxes - a tax for which the percentage of income paid in taxes remains the same at all income levels Regressive Taxes - a tax for which the percentage of income paid in taxes decreases as income increases Tax Bases The income, property, good or service that is subject to a tax individual income tax - tax based on personal earnings corporate income tax - tax based on company s profits property tax- real estate tax sales tax - goods and services sold Characteristics of a Good Tax Simplicity - simple and easy Efficiency - not wasting time and money Certainty - clear to a tax payer Equity - should be fair 2. Federal Taxes Taxes imposed by the federal government Individual Income Taxes Pay as you Earn Taxation Tax Brackets

12 12 Withholdings - taking payments out of your check before you receive it tax return - form used to file income taxes Taxable income - earnings on which taxes must be paid Personal exemptions - amount that a taxpayer may subtract from gross income for themselves, their spouse, and dependents Tax deductions - amount taxpayers can subtract from their amount of their income tax credit - amount taxpayers can subtract from their amount of their income tax Corporate Income Taxes Must pay federal income tax on their taxable income Social Security, Medicare, and Unemployment Taxes Social Security taxes - fund old age and disabled Medicare - national healthcare for people over 65 Unemployment - file for unemployment compensation Other types of Taxes Excise Tax - revenue tax on the sale of manufactured goods Estate Tax - tax on total value of the property of a person who has died Gift Tax - tax on the money or property that one living person gives to another Import Tax - tariff - items coming into the country 3. Federal Spending How much can the federal government spend? What should the government spend its money on? Mandatory and Discretionary Spending Mandatory Spending - Congress is required to spend on certain programs Discretionary Spending - spending about which lawmakers are free to make choices Entitlement Programs Social welfare programs that people are entitled to benefit if they meet certain eligibility requirements Social Security Medicare Medicaid Discretionary Spending Defense Spending Education and training Scientific Research

13 13 Student loans Law Enforcement Federal Aid to State and Local 404 billion dollars a year in federal monies divided among the states State and local governments rely on federal aid 4. State and Local Taxes and Spending Taxes imposed by local and state government State Budgets Budget - an estimate of future revenue and expenses Operating - day to day spending needs Capital - spending on major investments Balancing - revenue is equal to spending Where are State Taxes Spent Education Public Safety Highways and Transportation Public Welfare Arts and Recreation Administration State Tax Revenue Sales Tax Individual Income tax Corporate Income tax Other state taxes real property - land and any permanent structures to which a person has legal title to Personal property - movable possessions or assets Local Government Spending and Revenue Cities, Towns, townships, counties, and special districts Responsibilities - public buildings, fire stations, schools, law enforcement Property Tax Other local taxes

14 14 Chapter 15 Fiscal Policy 1. Understanding Fiscal Policy 2. Fiscal Policy Options 3. Budget Deficits and the National Debt 1. Understanding Fiscal Policy The use of government spending and revenue collection to influence the economy Setting Fiscal Policy Federal Budget - a written document estimating the federal government s revenue and authorizing its spending for the coming year Fiscal year month period used for budgeting purposes Appropriations bills - authorizes a specific amount of spending by the government Fiscal Policy and the Economy Expansionary Policy - encourage economic growth -increased spending or tax cuts Contractionary policy - used to reduce economic growth -decreased spending and higher taxes Limits of Fiscal Policy Difficulty of Changing Spending Levels Predicting the Future Political Pressures Delayed Results 2. Fiscal Policy Options Classical Economics Keynesian Economics Classical Economics A school of thought based on the idea that free markets regulate themselves Adam Smith - no government interference in a nation s economy Keynesian Economics Productive capacity - the maximum output that an economy can sustain over a period of time without increased inflation Demand-side economics-idea that demand drives an economy Keynesian - government action in the economy

15 15 3. Budget Deficit and the National Debt Spending money you don t have Balancing the Budget Budget surplus - situation in which budget revenue is higher than expenditures Budget deficit - situation in which budget revenue is lower than expenditures Response to deficit creating money borrowing money Treasury bills - short term 26 weeks or less Treasury notes - 2 to 10 years Treasury bonds - 30 years The National Debt The total amount of money the federal government owes to bondholders Is the Debt a Problem Reduces the funds available for businesses to invest Crowding out effect - loss of funds for private investments caused by government borrowing Controlling the Deficit Annual budget deficits have contributed to the national debt and lawmakers are always trying to agree on ways to cut the deficit Chapter 16 The Federal Reserve and Monetary Policy 1. The Federal Reserve System 2. Federal Reserve Functions 3. Monetary Policy Tools 4. Monetary Policy and Macroeconomics Stabilization 1. The Federal Reserve System Organized to provide money to banks that are in need of loans Banking History Monetary Policy - actions that the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in the economy Reserves - deposits that a bank keeps readily available as opposed to lending them out Reserve Requirements - the amount of reserves that banks require to keep hand on Federal Reserve Act of 1913 Congress, in 1913, passed the Federal Reserve Act, which allowed a group of 12 banks to lend to other banks in time of need

16 16 Structure of the Federal Reserve The Board of Governors Twelve Federal Reserve banks Member Banks -4,000 member banks and 2,500 depository institutions The Federal Open Market Committee 2. Federal Reserve Functions Biggest function - issue money Serving Government Banker and Agent -maintains a checking account for the federal government Issuing Currency - the Treasury Department Serving Banks Check Clearing - banks record whose account gives up money and whose account receives money when a customer writes a check Bank holding Company - company that owns more than one bank Lender of Last Resort Federal Funds Rate - interest rate that banks charge each other for loans Discount Rate - interest rate that the Federal Reserve charges commercial banks for loans Regulating the Banking System Reserves Bank Examinations Regulating the Money Supply The Demand for Money Stabilizing the Economy 3. Monetary Policy Tools The Federal Reserve has the power to make money Money Creation The process by which money enters into circulation Required Reserve Ratio - the fraction of deposits that banks are required to keep in reserve The Money Multiplier - a formula used to determine how much new money can be created with each demand deposit and added to the money supply

17 17 Reserve Requirements Increase in reserve requirements causes banks to increase reserves and the money supply in banking reduces, causing less lending A reduction in reserve requirements causes banks to decrease reserves and the money supply in banking increasing, causing more lending The Discount Rates The Prime Rate - fate of interest that banks charge on short-term loans to their best customers Open Market Operations The buying and selling of government securities in order to alter the money system - most often used monetary policy tool Bond Purchases Bond Sales Targets 4. Monetary Policy and Macroeconomic Stabilization Monetarism - the belief that the money supply is the most important factor in the macroeconomic performance How Monetary Policy Works Easy Money Policy - increases the money supply Tight Money Policy - reduces the money supply The Problem of Timing Must be carefully timed if it is to help the economy Good timing and bad timing Inside lag - time it takes to implement monetary policy Outside lag - the time it takes for monetary policy to have an effect Predicting Business Cycles The Federal Reserve must not only react to current trends, but must also anticipate change in the economy