5. Smart Cards. Smart cards are plastic cards with an embedded computer chip that can be
programmed with ―electronic money.‖
QUICK QUESTIONS
How might check writers benefit from Check 21? How might financial institutions
benefit from Check 21?
HOMEWORK
Interview a Manager
Now is also a good time to assign Application Exercise 10 from the end-of-chapter materials of
the textbook as homework. This assignment asks students to interview the local manager of a
bank and determine how requirements of various regulations have affected the bank.
At-Home Completion Time: 1-2 hours
Use In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail
Time Limit: 20 minutes
Learning Objective 16-6:
Discuss some of the institutions and activities in international banking and finance.
International Banking and Finance
Electronic technologies permit nearly instantaneous financial transactions around the globe.
These business exchanges—the prices asked and paid—are affected by values of the currencies
among the various nations involved in the transactions.
A. Currency Values and Exchange Rates
With today’s global activities, travelers, shoppers, investors, and businesses often rely on
banks to convert their dollars into other currencies. When it comes to choosing one currency
over others, the best choice changes from day to day. Every currency’s value changes,
reflecting global supply and demand—what traders are willing to pay—for one currency
relative to others. The resulting exchange rate, the value of one currency compared to the
value of another, reveals how much of one currency must be exchanged for another.
1. Strong Currency or Weak: Which Is Better? Most people would prefer a ―strong‖
currency, right? But it depends on how it will be used. ―Strong‖ means that the currency
is selling at a higher price and worth more, while ―weak‖ means that it is selling at a
2. Bank Policies Influence Currency Values. In managing the money supply and interest
rates, the Fed strongly influences the dollar’s strength against other currencies. The
B. The International Payments Process
International payments are simplified through the services provided by their local banks.
Payments from U.S. buyers start at a local bank that converts them from dollars into the
seller’s currency, such as into euros, for example, to be sent to a seller in, say, France. At the
same time, payments and currency conversions from separate transactions also are flowing
between French businesses and U.S. sellers in the other direction. When money inflows and
outflows remain equal for both countries, as a result of international transactions, money
C. International Bank Structure
Worldwide banking stability relies on a loose structure of agreements among individual
countries.
1. The World Bank. The World Bank provides only a very limited scope of services, such
2. The IMF. The International Monetary Fund (IMF) promotes the stability of exchange
rates, provides temporary loans to member countries, encourages members to cooperate
on international monetary issues, and encourages the development of a system for inter-
QUICK QUESTIONS
For what purposes has the International Monetary Fund been designed?
How do changes in currency exchange rates affect business decisions and results?
HOMEWORK
Creating Money
Now is a good time to assign Application Exercise 9 from the end-of-chapter materials of the
textbook as homework. This assignment asks students to calculate exchange rates looking into
the future.
At-Home Completion Time: 20 minutes
Learning Catalytics is a “bring your own device” student engagement, assessment,
and classroom intelligence system. It allows instructors to engage students in class
with realtime diagnostics. Students can use any modern, web-enabled device
(smartphone, tablet, or laptop) to access it. For more information on using
Learning Catalytics in your course, contact your Pearson Representative.
IN-CLASS ACTIVITIES
In-Class Activity 1: Ice-Breaker: How Much Would That Be in, Say,
Chocolate Bars?
Activity Overview:
This exercise asks students to consider the characteristics of money when making purchases
using something other than ―money.‖
Time Limit: 30 minutes
What to Do:
1. Divide the class into groups of two.
2. Ask each group to consider making the following purchases:
3. Ask each group member to interview his or her partner to determine just how many cans of
4. Ask each group to discuss whether any ―characteristics‖ of money are evident in these
transactions. (5 minutes)
5. Reassemble the class and share some of the groups’ responses. (10 minutes)
Don’t Forget:
In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail
Activity Overview:
This activity asks students to consider the advantages and disadvantages of replacing traditional
check writing with electronic payments.
Time Limit: 20 minutes
What to Do:
1. Ask students to work independently to make a list of pros and cons of using traditional check
writing and a list of pros and cons of using debit cards. (10 minutes)
2. Bring the class together to discuss the pros and cons of each option. Which option does the
class prefer? Why? (10 minutes)
ANSWERS FOR END OF CHAPTER ACTIVITIES
QUESTIONS FOR REVIEW
16-1. Explain the four characteristics of money.
Money must be portable or light to carry. Money must be divisible, meaning that it can be
16-2. What are the components of M-1 and M-2?
M-1 consists of currency, demand deposits, and other checkable deposits. M-2 includes M-1
16-3. Explain the roles of commercial banks, savings and loan associations, credit unions, and
nondeposit institutions in the U.S. financial system.
Commercial banks use deposits to make loans and to earn profits. Savings and loan
16-4. Describe the structure of the Federal Reserve System.
QUESTIONS FOR ANALYSIS
16-5. As a consumer, when would you favor a strong dollar? What about a weak dollar?
Would you consider these factors differently as an employee or employer?
The true answer is ―it depends‖ as a consumer about whether a weak or strong dollar is
preferable. For the consumer, if he or she has no international activities, there is no direct
Copyright © 2019 Pearson Education, Inc.
16–19
the product you want to buy from another country, or that you want to sell in another
country.
A weak dollar will result in higher prices in the U.S. on products made elsewhere but sold in
the U.S. However, if an international company manufactures the product in the U.S., it pays
for that manufacturing using the weaker dollars, and then exports the product to other
countries, with stronger currencies, and boosts its profits.
16-6. Should commercial banks be regulated, or should market forces be allowed to determine
the kinds of loans and the interest rates for loans and savings deposits? Why?
Answers will vary. This is a particularly good question to ask in light of the 2008
16-7. Customers who deposit their money in online-only checking and savings accounts can
often get higher interest rates than at brick-and-mortar banks. Why do you think that online
banks can offer these rates? What might be some drawbacks to online-only banking?
Online banks can offer higher returns because they do not have the same fixed assets
16-8. Start with a $1,000 deposit and assume a reserve requirement of 10 percent. Now trace the
amount of money created by the banking system after five lending cycles.
Cycle 1: $1,000.00 Cycle 1: $1,000 X 0.90 = $900.00
Cycle 2: $900.00 X 0.90 = $810.00
APPLICATION EXERCISES
16-9. The Federal Reserve Bank maintains historical and current data on exchange rates. Find
detailed historical rates by going to http://www.federalreserve.gov/releases/h10/Hist/. If you
used $5,000 to purchase Chinese yuan five years ago, how many yuan would you have
received? What would those yuan be worth today? (Use the data on the Fed site to calculate
these values and explain your calculations.)
Copyright © 2019 Pearson Education, Inc.
16–20
yuan. That same $5,000 would buy 33,100 yuan today. This, of course, does not take into
account the overall effects of inflation in either China or the U.S. (Learning Objective 6 –
AACSB – application of knowledge)
16-10. Interview the manager of a local commercial bank. Identify and list some of the newer
regulations that the bank has to comply with, like the Dodd-Frank Act. Does the bank feel
that these regulations are just a burden, or do they provide value? How do you feel about the
regulations?
Answers will vary, but most managers willing to discuss this topic will mention how the
BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 16-11 TO 16-15
(Learning Objectives 4 and 5 – AACSB – interpersonal relations and teamwork, analytical
thinking, reflective thinking, application of knowledge)
This exercise helps students focus on what they need to know to stay up to date on business news
TEAM EXERCISE: VIRTUAL BANKING: AN IDEA WHOSE TIME HAS COME?
16-16 TO 16-20
(Learning Objective 5 – AACSB – interpersonal relations and teamwork, ethical
understanding and reasoning, analytical thinking, reflective thinking, application of
knowledge)
16-16. Before hearing any of your group’s comments on this situation, and from the perspective
of your assigned role, what are the advantages and disadvantages of becoming a virtual bank?
16-18. Do you think that going virtual would attract new customers? What types of customers
would be most interested in virtual banking?
16-19. What are the potential risks of virtual banking for both the bank and the customer? How
can each protect itself?
16-20. What new services might Key Savings and Loan be able to offer if they go virtual?
This could be a really interesting discussion. The students’ responses to the Action Steps will
customers but not appealing to the older generation and the majority of employees will lose their
jobs.
EXERCISING YOUR ETHICS: TELLING THE ETHICAL FROM THE STRICTLY
LEGAL
(Learning Objectives 2 and 4 – AACSB – ethical understanding and reasoning, reflective
thinking)
16-21. From the standpoint of a commercial bank, can you find any economic justification for
ATM access fees?
From an economic standpoint, the fees can be justified since the bank is offering a service to
noncustomers, and should be compensated for the cost of that service plus a fair profit
16-22. Based on the scenario described for our bank, do you find any ethical issues in this
situation? Or do you find the main issues legal and economic rather than ethical?
Answers will vary, and certainly legal and economic issues are present. Potential ethical
issues revolve around the bank’s responsibility to the communities in which it operates.
Questions might include:
16-23. As an officer for this bank, how would you handle this situation?
Answers will vary, but students will likely point out that ATM fees are legal and that banks
CASES: WHERE DID ALL THE MONEY GO?
(Learning Objectives 1, 2, 3, 4 – AACSB – analytical thinking, reflective thinking,
application of knowledge)
16-24. Describe the differences between fiscal policy and monetary policy. What effects do you
think each have on the day-to-day operations of a business? Should a business owner be
concerned with these kinds of macro-economic issues? If so, why?
Fiscal policy focuses on taxation and spending by a government while monetary policy is the
management of the nation’s economic growth by managing the money supply and interest
rates. The government is responsible for fiscal policy, while the Fed is responsible for
16-25. The Fed is supposedly non-political body. Do you agree with this observation? Do you
think it should be, or shouldn’t be? Why?
16-26. In 2017, the U.S. government was $20 trillion in debt. Should the government print
money to pay off the debt? What effect would such a strategy have on consumers and
business?
No, the government should not print money to pay off the debt. Increasing the money supply
16-27. Why do economically stressed countries with massive debt have difficulty borrowing
outside money needed for economic recovery? Explain.
The first obstacle is difficulty borrowing outside money for economic recovery, although
16-28. If banks are required to keep larger cushions of cash on hand (increased reserve
requirements) rather than loaning out that money (as proposed in the Basel III
Requirements), in what ways will the U.S. economy be affected?
High requirements mean that banks have less money to lend and the money supply is
GLOBAL TRADING PARTNER RESETS ITS ECONOMIC COMPASS
(Learning Objectives 1, 2, 3, and 4 – AACSB – analytical thinking, reflective thinking,
application of knowledge)
16-29. What is deflation? How would increasing the money supply in Japan result in an end to
deflation?
Deflation occurs when the supply of goods outpaces the supply of money, so demand for
16-30. The Bank of Japan pumped lots of money into the Japanese economy using tactics similar
to the Federal Reserve Bank in the United States. When the Fed wishes to put money into the
economy, what tools do they use?
16-31. Consider the ways that Japan’s economy would likely be affected by having a strong yen
versus a weak yen. Compare and discuss the positive implications and the negative
implications for both a strong and a weak yen.
When the yen is strong, it is selling at a higher price and is worth more. When it is weak, it is
16-32. How will Japan’s new monetary policies have an impact on the U.S. economy? Identify
and discuss the ways those policies will be felt in the United States.
By boosting consumer confidence, the government hopes to overcome the deflationary mind-
set, and increase large amounts of money into the economy. The policies will affect the U.S.
16-33. Consider Japan’s trading status as the fourth-largest source of U.S. imports, and the
fourth-largest market for U.S. goods exports. Would you expect that status to change soon
relative to other U.S. trading partners such as Canada, China, Germany, and others? Explain.
It is likely that at least one of the two rankings will change. If Japanese exports to the U.S.
increase, then it is possible for Japan to become the third largest supplier. It is not likely that
it can move ahead of China, but may be able to move ahead of Canada or Mexico, at least in