Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-1
chapter
.
Money, Financial
Institutions, and the
Federal Reserve
what’s new in this edition 20.3
brief chapter outline and learning objectives 20.5
lecture outline and lecture notes 20.7
PowerPoint slide notes 20.55
lecture enhancers 20.70
lecture enhancer 20–1: FIXED ASSETS, OR WHY A LOAN IN YAP IS HARD TO 20.70
ROLL OVER
lecture enhancer 20–2: LEGISLATORS QUESTION THE PENNY’S NEED 20.71
lecture enhancer 20–3: EURO PORTRAITS 20.72
lecture enhancer 20-4: MONEY FACTS 20.72
lecture enhancer 20-5: THE ENDURING POWER OF THE DOLLAR 20.73
lecture enhancer 20-6: WRENCHING INFLATION OUT OF THE ECONOMY 20.74
lecture enhancer 20-7: GOLDSMITH BANKING 20.75
20
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-2
lecture enhancer 20–8: CREDIT UNIONS BECOME MORE LIKE BANKS 20.75
lecture enhancer 20–9: MORE BANKS TEAM UP WITH WESTERN UNION 20.76
lecture enhancer 20–10: THE UNPREDICTABLE BITCOIN’S VALUE SEESAW 20.77
critical thinking exercises 20.78
critical thinking exercise 20–1: BARTERING: BUYING A PAIR OF JEANS 20.78
critical thinking exercise 20–2: TEST YOUR KNOWLEDGE OF MONEY 20.80
critical thinking exercise 20–3: CURRENCY TRADING 20.85
critical thinking exercise 20–4: RESEARCHING THE FEDERAL RESERVE’S 20.86
TOOLS
bonus cases 20.87
bonus case 20-1: WHEN MONEY LOSES ITS MEANING 20.87
bonus case 20-2: REFORMING WALL STREET 20.89
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-3
what’s new in
this edition
additions to the 11th edition:
• Getting to Know Janet Yellen of the Federal Reserve
• Name That Company: The Bitcoin Shop and Bitcoin
• Discussion of Bitcoin added to subsection What Is Money?
• Adapting to Change: The Bitcoin is in the Mail
• Spotlight on Small Business: Taking a Bite Out of the Sharks
• Reaching Beyond Our Borders: New Day, New Issues Across the Globe
• Video Case: Financial Crisis
revisions to the 11th edition:
• Making Ethical Decisions: Would You Tell the Teller?
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Ben Bernake
• Name That Company: Mango
• Social Media in Business
• Spotlight on Small Business
• Reaching Beyond Our Borders
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-4
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-5
brief chapter outline
and learning objectives
CHAPTER 20
MONEY, FINANCIAL INSTITUTIONS, AND THE
FEDERAL RESERVE
Getting to Know JANET YELLEN, CHAIRMAN of the FEDERAL RE-
SERVE
learning objective 1
Explain what money is and what makes money useful.
I. WHY MONEY IS IMPORTANT
A. What Is Money?
learning objective 2
Describe how the Federal Reserve controls the money supply.
B. What Is the Money Supply?
C. Managing Inflation and the Money Supply
D. The Global Exchange of Money
II. CONTROL OF THE MONEY SUPPLY
A. Basics about the Federal Reserve
B. The Reserve Requirement
C. Open-Market Operations
D. The Discount Rate
E. The Federal Reserve’s Check-Clearing Role
learning objective 3
Trace the history of banking and the Federal Reserve System.
III. THE HISTORY OF BANKING AND THE NEED FOR THE FED
A. Banking and the Great Depression
learning objective 4
Classify the various institutions in the U.S. banking system.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-6
IV. THE U.S. BANKING SYSTEM
A. Commercial Banks
B. Services Provided by Commercial Banks
C. Services to Borrowers
D. Savings and Loan Associations (S&Ls)
E. Credit Unions
F. Other Financial Institutions (Nonbanks)
learning objective 5
Briefly trace the causes of the banking crisis starting in 2008 and ex-
plain how the government protects your funds during such crises.
V. THE BANKING CRISIS AND HOW THE GOVERNMENT PRO-
TECTS YOUR MONEY
A. Protecting Your Funds
B. The Federal Deposit Insurance Corporation (FDIC)
C. The Savings Association Insurance Fund (SAIF)
D. The National Credit Union Administration (NCUA)
learning objective 6
Describe how technology helps make banking more efficient.
VI. USING TECHNOLOGY TO MAKE BANKING MORE EFFICIENT
A. Online Banking
learning objective 7
Evaluate the role and importance of international banking, the World
Bank, and the International Monetary Fund.
VII. INTERNATIONAL BANKING AND BANKING SERVICES
A. Leaders in International Banking
B. The World Bank and the International Monetary Fund (IMF)
VIII. SUMMARY
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-7
Getting to Know JANET YELLEN, of the FEDERAL RESERVE
Janet Yellen is the first woman to ever chair the Fed in its 100-year history.
learning objective 1
Explain what money is and how its value is determined.
I. WHY MONEY IS IMPORTANT
A. Economic growth and creation of jobs depends on
money—its availability and its value relative to other
currencies.
1. The recent banking crisis has focused attention
on the Federal Reserve.
2. Money is so important that many institutions have
evolved to manage money and to make it availa-
ble to you when you need it.
3. The flow of money from country to country is as
free as the flow FROM STATE TO STATE.
4. Each day about $4 trillion is exchanged in world
markets.
5. What happens to any major country’s economy
has an effect on the U.S. economy, and vice ver-
sa.
B. WHAT IS MONEY?
1. MONEY is anything that people generally accept
This company recently opened an online store using a new form of money. What is the name
of the company and what currency does it use?
(Students should read the chapter before guessing: The Bitcoin Shop and
Bitcoin.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-8
PPT 20-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Money,
Financial
Institutions,
and the Federal
Reserve
CHAPTER 20
PPT 20-2
Learning Objectives
LEARNING OBJECTIVES
20-2
1. Explain what money is and what makes money
useful.
2. Describe how the Federal Reserve controls the
money supply.
3. Trace the history of banking and the Federal
Reserve System.
4. Classify the various institutions in the U.S. banking
system.
PPT 20-3
Learning Objectives
LEARNING OBJECTIVES
20-3
5. Briefly trace the causes of the banking crisis, and
explain how the government protects your funds
during such crises.
6. Describe how technology helps make banking more
efficient.
7. Evaluate the role and importance of international
banking, the World Bank, and the International
Monetary Fund.
PPT 20-4
Janet Yellen
JANET YELLEN
Federal Reserve
20-4
• The first female chair of the
Federal Reserve.
• Earned her doctorate in
economics from Yale and
was appointed to the Federal
Reserve Board of Governors
by President Clinton.
• Almost every factor related to
the economy is influenced by
the decisions she makes.
PPT 20-5
Name That Company
NAME that COMPANY
20-5
This company recently opened an online store using
a new form of money.
Name that company and what currency it uses!
lecture enhancer 20-1
FIXED ASSETS, OR WHY A LOAN IN
YAP IS HARD TO ROLL OVER
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-9
as payment for goods and services.
2. BARTER is the direct trading of goods and ser-
vices for other goods and services.
a. Many people have discovered the benefits of
bartering online.
b. Others today still barter goods and services,
but transactions are difficult.
c. Today BARTER EXCHANGES let people
put goods and services into the system and
get credits for other goods and services.
d. People need some form of currency that is
PORTABLE, DIVISIBLE, DURABLE, AND
STABLE so that they can trade without hav-
ing to carry the actual goods.
3. COINS AND PAPER BILLS meet all the stand-
ards for a more useful money:
a. PORTABILITY: Coins are easier to take to
market than goods.
b. DIVISIBILITY: Different-sized coins can be
made to represent different values.
c. STABILITY: When everybody agrees on the
value of coins, the value of money is rela-
tively stable.
d. DURABILITY: Coins last for thousands of
years.
e. UNIQUENESS:
i. The government has had to go to extra
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-10
PPT 20-6
What’s Money?
• Money — Anything people generally accept as
payment for goods and services.
WHAT’S MONEY?
20-6
LO 20-1
• Barter — The direct trading of
goods or services for other
goods or services.
critical thinking
exercise 20-1
BARTERING: BUYING A PAIR OF
JEANS
This exercise explores how bartering would work using the
example of a pair of jeans. (See the complete exercise on page
20.78 of this manual.)
PPT 20-7
Standards for a Useful Form of
Money
STANDARDS for a
USEFUL FORM of MONEY
20-7
LO 20-1
• Portability
• Divisibility
• Stability
• Durability
• Uniqueness
lecture enhancer 20-2
LEGISLATORS QUESTION THE
PENNY’S NEED
The lowly penny can buy very little. Should the coin be
phased out? (See the complete lecture enhancer on page 20.71
of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-11
lengths to make real dollars readily iden-
tifiable.
ii. The new paper money has many securi-
ty enhancements, including blue, peach,
and green color inks.
4. Coins and paper money thus became UNITS OF
VALUE, simplifying exchanges.
a. Most countries have their own coins and pa-
per that they use as money.
b. However, they are not always equally stable.
5. ELECTRONIC CASH (E-CASH) is the latest
form of money.
a. You can pay bills online.
b. You can also e-send e-cash to anyone using
services such as PayPal.
c. Bitcoin is a new form of e-cash.
learning objective 2
Describe how the Federal Reserve controls the money supply.
C. WHAT IS THE MONEY SUPPLY?
1. Control of the money supply involves two ques-
tions:
a. What is the money supply?
b. Why does it need to be controlled?
2. The MONEY SUPPLY is the amount of money
the Federal Reserve Bank makes available for
people to buy goods and services.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-12
lecture enhancer 20-3
EURO PORTRAITS
Ten years after the introduction of the euro, the European Un-
ion is honoring the original 10 adopters. (See the complete
lecture enhancer on page 20.72 of this manual.)
ADAPTING TO
change
PPT 20-8
The Bitcoin is in the Mail
The BITCOIN is in the MAIL
20-8
• Bitcoin is a digital currency
created in 2008.
• It is attractive to many users
because there is no central
regulating authority.
• Transactions are between only
two people without middlemen.
• This, however, makes valuing
Bitcoin difficult.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-13
3. There are several CLASSIFICATIONS OF THE
MONEY SUPPLY (M-1, M-2, and so on).
a. M-1 is money that can be accessed quickly
and easily (coins and paper bills, checks,
traveler’s checks, etc.).
b. M-2 is money included in M-1 plus money
that may take a little more time to obtain
(savings accounts, money market accounts,
mutual funds, certificates of deposit, and the
like).
c. M-2 is the most commonly used definition of
money.
d. M-3 is M-2 plus big deposits like institutional
money market funds.
D. MANAGING INFLATION AND THE MONEY SUP-
PLY
1. If TOO MUCH MONEY is available, prices go
up: INFLATION (too much money chasing too
few goods).
2. If TOO LITTLE MONEY is available, prices
would go down: DEFLATION.
3. The prices of goods and services can be man-
aged somewhat by controlling the amount of
money available in the economy.
E. THE GLOBAL EXCHANGE OF MONEY
1. FALLING DOLLAR means that the amount of
goods and services you can buy with a dollar
GOES DOWN.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-14
PPT 20-9
The Money Supply
The MONEY SUPPLY
20-9
LO 20-2
• Money Supply — The amount of money the Federal
Reserve makes available for people. The money
supply is referred to as:
– M1 — Money that can be accessed quickly (coins,
paper money, travelers
’
checks, etc.).
– M2 — M1 + money that may take a little time to
obtain (savings accounts, mutual funds, etc.).
– M3 — M2 + big deposits like institutional money
market funds.
lecture enhancer 20-4
MONEY FACTS
Why do some coins have grooved edges? How much gold is in
Fort Knox? (See the complete lecture enhancer on page 20.72
of this manual.)
critical thinking
exercise 20-2
TEST YOUR KNOWLEDGE OF
MONEY
This exercise is a brief test of the student’s knowledge of
money. (See the complete exercise on page 20.80 of this man-
ual.)
PPT 20–10
New Money
NEW MONEY
Paper Money Printed in 2010 (In $ Billions)
Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014. 20-10
LO 20-2
PPT 20-11
How Long Does Paper Money
Last?
HOW LONG DOES
PAPER MONEY LAST?
Source: Federal Reserve, www.federalreserve.gov, accessed November 2014. 20-11
Bill How Long it Lasts
$1 21 Months
$5 16 Months
$10 18 Months
$20 24 Months
$50 55 Months
$100 89 Months
LO 20-2
PPT 20-12
Money Milestones
MONEY MILESTONES
20-12
Year Milestone
1956 Congress set the minimum wage at $1 an hour
1960 $10 million presidential campaign by candidate Richard Nixon
1985 $100,000 bottle of wine sold at auction at Christie’s
1995 $1 million cost for a 30-second commercial during Super Bowl XXIX
2001 $10 movie ticket in New York
2004 $100 million Picasso painting sold at Sotheby’s
2007 $1 billion stadium built in London (Wembley)
LO 20-2
PPT 20-13
Money Facts
MONEY FACTS
What You Might Not Know About What’s in Your Wallet
Source: Fast Company, wwww.fastcompany.com, accessed November 2014. 20-13
LO 20-2
• In 2009, the U.S. printed 26,000,000 bills a day!
• Each penny costs 1.6¢ and each nickel costs 6¢
to make.
• The most-tracked bill on WheresGeorge.com has
travelled over 4,100 miles in 3 years!
• 2/3 of all U.S. $100 bills are outside the U.S.
• 90% of paper money has traces of cocaine!
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-15
2. RISING DOLLAR means that the amount of
goods and services you can buy with a dollar
GOES UP.
3. For example, a strong euro would drive up the
cost of cars from Germany.
4. What makes the dollar weak or strong is the
POSITION OF THE U.S. ECONOMY relative to
other economies.
a. In a STRONG ECONOMY, the demand for
dollars is high and the value of the dollar ris-
es.
b. When the country’s economy is perceived as
WEAKENING, the demand for the dollar de-
clines and the value of the dollar falls.
II. CONTROL OF THE MONEY SUPPLY
A. An organization is needed that CONTROLS THE
MONEY SUPPLY to try to keep the U.S. economy
from growing too fast or too slowly.
1. The organization in charge of monetary policy is
the FEDERAL RESERVE SYSTEM (THE FED).
B. BASICS ABOUT THE FEDERAL RESERVE
1. The Federal Reserve System consists of five
major parts:
a. The BOARD OF GOVERNORS administers
and supervises the 12 Federal Reserve Sys-
tem banks.
i. Seven members are appointed by the
president and confirmed by the senate.