Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-16
PPT 20-14
Exchanging Money Globally
EXCHANGING MONEY GLOBALLY
20-14
LO 20-2
• Falling dollar value: The amount of goods and
services you can buy with a dollar decreases.
• Rising dollar value: The amount of goods and
services you can buy with a dollar increases.
• What makes the dollar fall or rise is the position of
the U.S. economy relative to other global
economies.
critical thinking
exercise 20-3
CURRENCY TRADING
This exercise asks the student to research currency values and
calculate several currency conversions. (See the complete
exercise on page 20.85 of this manual.)
lecture enhancer 20-5
THE ENDURING POWER OF THE
DOLLAR
As the U.S. economy ebbs and flows, the dollar remains rela-
tively strong…though not as strong as it used to be. (See the
complete lecture enhancer on page 20.73 of this manual.)
PPT 20–15
The Impact of a Falling Dollar
The IMPACT of a
FALLING DOLLAR
• Overseas demand for U.S. products rise.
• A favorable exchange rate for U.S. companies
increases profits in foreign markets.
20-15
LO 20-2
• U.S. tourism increases
which is good for hotels,
resorts, theme parks, and
retailers that serve
international travelers.
PPT 20-16
Five Major Parts of the Federal
Reserve System
FIVE MAJOR PARTS of the
FEDERAL RESERVE SYSTEM
20-16
LO 20-2
1. The Board of Governors
2. The Federal Open
Market Committee
3. 12 Federal Reserve
Banks
4. 3 Advisory Councils
5. The member banks of
the system
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-17
ii. The primary function is to set monetary
policy.
b. The FEDERAL OPEN MARKET COMMIT-
TEE has 12 voting members and is the poli-
cy–making body.
c. The 12 FEDERAL RESERVE BANKS
d. THREE ADVISORY COUNCILS
e. The MEMBER BANKS of the system
2. The FEDERAL RESERVE:
a. Buys and sells foreign currencies
b. Regulates various types of credit
c. Supervises banks
d. Collects data on the money supply and other
economic activities
3. The TOOLS USED TO REGULATE THE MON-
EY SUPPLY include reserve requirements,
open-market operations, and the discount rate.
C. THE RESERVE REQUIREMENT
1. The RESERVE REQUIREMENT is a percentage
of commercial bank’s checking and savings ac-
counts that must be physically kept in the bank
(for example, as cash in the vault) or a non-
interest-bearing deposit at the local Federal Re-
serve district bank.
2. Changing the reserve requirement is one of the
Fed’s most powerful tools.
3. When the Fed INCREASES THE RESERVE
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-18
PPT 20-17
The 12 Federal Reserve District
Banks
TEXT FIGURE 20.1
The Federal Reserve District Banks
The 12 FEDERAL RESERVE
DISTRICT BANKS
20-17
LO 20-2
PPT 20-18
The 12 Federal Reserve District
Banks
TEXT FIGURE 20.2
How the Federal Reserve Controls
the Money Supply
MANAGING the MONEY SUPPLY
20-18
LO 20-2
critical thinking
exercise 20-4
RESEARCHING THE FEDERAL
RESERVE’S TOOLS
This exercise asks the student to go online and obtain up-to–
date information about the Fed’s money supply management
tools. (See the complete exercise on page 20.86 of this manu-
al.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-19
REQUIREMENT:
a. Banks have LESS MONEY FOR LOANS
and make fewer loans, which reduces infla-
tion.
b. The money supply would be REDUCED and
prices would likely fall.
4. When the Fed DECREASES THE RESERVE
REQUIREMENT:
a. Banks have MORE MONEY AVAILABLE
FOR LOANS and make more loans.
b. An increase in the money supply STIMU-
LATES THE ECONOMY for higher growth,
but it can also create inflationary pressures.
D. OPEN-MARKET OPERATIONS
1. The most commonly used tool is OPEN-
MARKET OPERATIONS, the buying and selling
of U.S. government bonds by the Fed with the
goal of regulating the money supply.
2. When the Fed wants to DECREASE THE
MONEY SUPPLY, it SELLS GOVERNMENT
SECURITIES to the public.
3. When the Fed wants to INCREASE THE MON-
EY SUPPLY, it BUYS GOVERNMENT SECU-
RITIES from individuals, corporations, or organi-
zations willing to sell.
E. THE DISCOUNT RATE
1. The Fed is called the BANKER’S BANK.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-20
lecture enhancer 20-6
WRENCHING INFLATION OUT OF
THE ECONOMY
The U.S. inflation rate in 1979 was almost 15%. Then Federal
Reserve chair Paul Volcker was appointed in 1980 with a
mandate to bring inflation under control. (See the complete
lecture enhancer on page 20.74 of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-21
2. Member banks can borrow money from the Fed
and then pass it on to their customers.
3. The DISCOUNT RATE is the interest rate that
Fed charges for loans to member banks.
4. INCREASING THE DISCOUNT RATE discour-
ages banks from borrowing and consequently
reduces the number of available loans, resulting
in a DECREASE IN THE MONEY SUPPLY.
5. LOWERING THE DISCOUNT RATE encour-
ages bank borrowing and increases the amount
of funds available for loans, resulting in an IN-
CREASE IN THE MONEY SUPPLY.
6. The Fed also sets the FEDERAL FUNDS
RATE, the rate that banks charge each other.
F. THE FEDERAL RESERVE’S CHECK-CLEARING
ROLE
1. One of the functions of the Federal Reserve
System is to help PROCESS YOUR CHECKS.
2. When a check is presented at another bank, a
complicated process (shown in Figure 20.3)
transfers funds from one’s home bank.
3. This process is costly, so banks try to LESSEN
THE USE OF CHECKS through use of credit
cards, debit cards, and electronic transfer of
money.
G. The WHOLE ECONOMY is affected by actions tak-
en by the Federal Reserve System.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-22
PPT 20-19
Check-Clearing Process through
the Federal Reserve
TEXT FIGURE 20.3
Check-Clearing Process through
the Federal Reserve Bank System
CHECK-CLEARING PROCESS
THROUGH the FEDERAL RESERVE
20-19
LO 20-2
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-23
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. EARLY BANKING HISTORY
1. There were NO BANKS IN EARLY COLONIAL
AMERICA.
a. Strict laws limited the number of coins that
could be brought to the colonies.
b. Colonists were forced to barter for goods.
2. MASSACHUSETTS issued its own PAPER
MONEY in 1690, and soon other colonies did as
well.
a. But CONTINENTAL MONEY, the first paper
money printed in the U.S., became worth-
less because people didn’t trust its value.
b. LAND BANKS were established to make
loans to farmers, but England stopped these
practices by 1741.
c. Colonies rebelled against these restrictions,
and a new bank was formed during the
American Revolution.
3. ALEXANDER HAMILTON convinced Congress
to form a CENTRAL BANK in 1791.
a. The bank had so much opposition that it
closed in 1811.
b. An attempt to replace the bank in 1816
caused conflict between the Second (Cen-
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-24
test
prep
PPT 20-20
Test Prep
TEST PREP
20-20
• What is money?
• What are the five characteristics of useful money?
• What is Bitcoin?
• What is the money supply, and why is it important?
• How does the Federal Reserve control the money
supply?
• What are the major functions of the Federal
Reserve? What other functions does it perform?
lecture enhancer 20-7
GOLDSMITH BANKING
Economists believe that modern money and banking have
their roots in medieval Europe with the village goldsmith. (See
the complete lecture enhancer on page 20.75 of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-25
tral) Bank and state banks.
c. The bank was closed in 1836.
4. By the time of the CIVIL WAR, banking was a
mess.
a. Different banks issued DIFFERENT CUR-
RENCIES.
b. Often the COINS were worth more as gold
or silver than as coins.
c. Many people became nervous about their
money and caused runs on banks; TRUST
IN BANKING DECLINED.
5. The cash shortage problems of 1907 led to the
formation of the FEDERAL RESERVE SYS-
TEM, designated as a “LENDER OF LAST RE-
SORT.”
a. All federally chartered banks MUST join;
state-chartered banks MAY join.
b. The Federal Reserve became the BANK-
ERS’ BANK.
B. BANKING AND THE GREAT DEPRESSION
1. The STOCK MARKET CRASH OF 1929 led to
bank failures in the early 1930s.
2. People rushed to take money out of banks;
BANKS RAN OUT OF MONEY and closed.
3. Franklin D. Roosevelt extended these bank clos-
ings in 1933 to gain time for a solution.
4. In 1933 and 1935, the federal government
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-26
PPT 20-21
The Establishment of the Federal
Reserve System
• A cash shortage problem in 1907 led to the
creation of the Federal Reserve System.
The ESTABLISHMENT of the
FEDERAL RESERVE SYSTEM
20-21
LO 20-3
• Under the Federal
Reserve Act of 1913,
all federally chartered
banks had to join the
Federal Reserve.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-27
passed LAWS to strengthen the banking sys-
tem.
5. The government also started an insurance pro-
gram to protect depositors from bank failures.
learning objective 4
Classify the various institutions in the U.S. banking system.
IV. THE U.S. BANKING SYSTEM
A. The U.S. BANKING SYSTEM consists of commer-
cial banks, savings and loan associations, credit un-
ions, mutual savings banks, and nonbanks.
B. COMMERCIAL BANKS
1. A COMMERCIAL BANK is a profit-making or-
ganization that receives deposits from individu-
als and corporations in the form of checking and
savings accounts and then uses some of these
funds to make loans.
2. Commercial banks have two types of customers:
DEPOSITORS and BORROWERS.
3. Commercial banks make a profit if the revenue
generated by loans exceeds the interest paid to
depositors.
C. SERVICES PROVIDED BY COMMERCIAL BANKS
1. Individuals and corporations that deposit money
in a checking account can write personal checks
to pay for almost any transaction.
2. A DEMAND DEPOSIT is the technical name for
a checking account; the money in a demand de-
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-28
bonus case 20-1
WHEN MONEY LOSES ITS
MEANING
This case explores what happens when hyperinflation erodes
the value of a country’s money. (See the complete case, dis-
cussion questions, and suggested answers beginning on page
20.87 of this manual.)
PPT 20-22
Largest Bank Failures
LARGEST BANK FAILURES
20-22
Bank Year Assets
Washington Mutual Bank 2008 $307 Billion
Continental Illinois NB&T 1984 $67 Billion
First Republic Bank Corp 1986 $49 Billion
IndyMac Bank 2008 $32 Billion
American Savings & Loan Assn 1988 $30 Billion
Colonial Bank 2009 $25 Billion
Source: FDIC.gov, accessed November 2014.
LO 20-3
PPT 20-23
The U.S. Banking System
The U.S. BANKING SYSTEM
20-23
LO 20-4
• Commercial banks
• Savings and loan
associations
• Credit unions
• Nonbanks
PPT 20-24
Commercial Banks
COMMERCIAL BANKS
20-24
LO 20-4
• Commercial Bank — A profit-seeking organization
that receives deposits from individuals and
corporations in the form of checking and savings
accounts and uses those funds to make loans.
• A commercial bank has two types of customers:
1. Depositors
2. Borrowers
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-29
posit can be withdrawn anytime on demand from
the depositor.
a. Banks impose a service charge for check
writing, and may charge a handling fee.
b. In the past, checking accounts paid no inter-
est, but interest-bearing checking accounts
have grown in recent years.
3. A TIME DEPOSIT is the technical name for a
savings account; the bank can require prior no-
tice before the owner withdraws money from a
time deposit.
a. A CERTIFICATE OF DEPOSIT (CD) is a
time-deposit (savings) account that earns in-
terest to be delivered at the end of the certif-
icate’s maturity date.
b. The CD cannot be withdrawn without penalty
until the MATURITY DATE.
c. The INTEREST RATE depends on the
length of the period, the economic condi-
tions, and the prime rate at the time of de-
posit.
4. Commercial banks may also offer OTHER
SERVICES, such as credit cards, brokerage
services, financial counseling, automatic pay-
ment of bills, safe deposit boxes, tax-deferred
IRAs, travelers’ checks, and overdraft privileges.
5. AUTOMATED TELLER MACHINES (ATMs)
give customers the convenience of 24-hour
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-30
PPT 20-25
Commercial Banks’ Services
COMMERICAL BANKS’
SERVICES
20-25
LO 20-4
• Demand Deposit — The technical name for a
checking account; money is available on demand
from the depositor.
• Time Deposit — A savings account; a bank can
require a prior notice before you make a withdrawal.
• Certificate of Deposit — A savings account that
earns interest, to be delivered on the certificate
’
s
maturity date.
MAKING ETHICAL
decisions
PPT 20-26
Would You Tell
the Teller?
WOULD YOU TELL the TELLER?
20-26
• The bank teller mistakenly gives you $320 instead
of the $300 you asked for.
• You bring the error to her attention, but she
disagrees she miscounted the money.
• You wonder whether to just keep the extra $20
even though you know her accounts will not
balance at the end of the day.
• What are your alternatives? What do you do?