1 Instructor’s Manual – Chapter 15 | Ferrell / Hirt / Ferrell: Business © 2016 by McGraw-Hill Education.
Ferrell / Hirt / Ferrell:
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Instructor’s Manual – Chapter 15
Chapter 15: Money and the Financial System
Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s
highlights. Follow-up via the Connect exercises is then encouraged to provide a holistic understanding of the
chapter.
C H A P T E R F O R E C A S T
From Wall Street to Main Street, both overseas and at home, money is the one tool used to measure personal
and business income and wealth. We begin our discussion with a definition of money and then explore some of
the many forms money may take. Next, we examine the roles of the Federal Reserve Board and other major
institutions in the financial system. Finally, we explore the future of the finance industry and some of the
changes likely to occur over the course of the next several years.
L E A R N I N G O B J E C T I V E S
LO 15-1 Define money, its functions, and its characteristics.
LO 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American
banking system.
LO 15-5 Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual
funds, and finance companies.
LO 15-7 Recommend the most appropriate financial institution for a hypothetical small business.
L E A R N T H E T E R M S
automated clearinghouses
(ACHs) (p. 475)
463)
checking account (p. 462)
commercial banks (p. 469)
debit card (p. 464)
Federal Reserve Board (p. 465)
finance (p. 458)
finance companies (p. 474)
money (p. 458)
open market operations (p. 466)
pension funds (p. 472)
reserve requirement (p. 467)
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K E Y T E R M S A N D D E F I N I T I O N S
automated clearing-houses
(ACHs)
A system that permits payments such as deposits or withdrawals to be
made to and from a bank account by magnetic computer tape.
automated teller machine
(ATM)
The most familiar form of electronic banking, which dispenses cash,
accepts deposits, and allows balance inquiries and cash transfers from
one account to another.
brokerage firms
Firms that buy and sell stocks, bonds, and other securities for their
customers and provide other financial services.
certificates of deposit (CDs)
Savings accounts that guarantee a depositor a set interest rate over a
specified interval as long as the funds are not withdrawn before the end
of the period—six months or one year, for example.
checking account
Money stored in an account at a bank or other financial institution that
can be withdrawn without advance notice; also called a demand deposit.
commercial banks
The largest and oldest of all financial institutions, relying mainly on
checking and savings accounts as sources of funds for loans to
businesses and individuals.
credit cards
Means of access to preapproved lines of credit granted by a bank or a
finance company.
credit controls
The authority to establish and enforce credit rules for financial
institutions and some private investors.
credit union
A financial institution owned and controlled by its depositors, who
usually have a common employer, profession, trade group, or religion.
debit card
A card that looks like a credit card but works like a check; using it results
in a direct, immediate, electronic payment from the cardholder’s
checking account to a merchant or third party.
discount rate
The rate of interest the Fed charges to loan money to any banking
institution to meet reserve requirements.
electronic funds transfer
(EFT)
Any movement of funds by means of an electronic terminal, telephone,
computer, or magnetic tape.
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Ferrell / Hirt / Ferrell:
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Instructor’s Manual – Chapter 15
Federal Deposit Insurance
Corporation (FDIC)
An insurance fund established in 1933 to insure individual bank
accounts.
Federal Reserve Board
An independent agency of the federal government established in 1913
to regulate the nation’s banking and financial industry.
finance
The study of money: how it’s made, how it’s lost, and how it’s managed.
finance companies
Businesses that offer short-term loans at higher rates of interest than
banks.
insurance companies
investment banker
Businesses that protect their clients against financial losses from certain
specified risks (death, accident, and theft, for example) in exchange for a
fee, called a premium.
Underwrites new issues of securities for corporations, states, and
municipalities
monetary policy
Means by which the Fed controls the amount of money available in the
economy.
money
Anything generally accepted in exchange for goods and services.
money market accounts
Accounts that offer higher interest-rates than standard bank rates but
with greater restrictions.
mutual fund
An investment company that pools individual investor dollars and
invests them in large numbers of well-diversified securities.
mutual savings banks
Financial institutions that are similar to savings and loan associations
but, like credit unions, are owned by their depositors.
National Credit Union
Association (NCUA)
An agency that regulates and charters credit unions and insures their
deposits through its National Credit Union Insurance Fund.
open market operations
Decisions by the Fed to buy or sell U.S. Treasury bills (short-term debt
issued by the U.S. government) and other investments in the open
market.
pension funds
Managed investment pools set aside by individuals, corporations,
unions, and some nonprofit organizations to provide retirement income
for members.
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Instructor’s Manual – Chapter 15
reserve requirement
The percentage of deposits that banking institutions must hold in
reserve.
savings accounts
Accounts with funds that usually cannot be withdrawn without advance
notice; also known as time deposits.
savings and loan
associations (S&Ls)
Financial institutions that primarily offer savings accounts and make
long-term loans for residential mortgages; also called “thrifts.”
C O N T E N T O U T L I N E
The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS
learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with
LECTURE NOTES to drive home teaching points. There is also a reminder on when CONNECT activities can be
used. This is created so that you can facilitate in–class or online discussion effectively.
LO 15-1
Define money, its functions, and its characteristics.
• Introduction
• Money in the Financial System
o Functions of Money
o Characteristics of Money
PowerPoint Slides
PPT 15.4
Lecture Outline and Notes:
I. Money in the Financial System
A. Finance is the study of money; how it’s made, how it’s lost, and how it’s
managed.
B. Money (or currency) is anything generally accepted in exchange for
goods and services.
1. Many things have served as money: salt, cattle, and precious metals.
a. Most of these materials were limited-supply commodities that
had their own value to society.
2. “IOUs,” slips of paper that could be exchanged for a specified supply
of the underlying commodity, developed later.
3. Finally, fiat money is paper money not readily convertible to a
precious metal, such as gold; it did not gain full acceptance until the
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PPT 15.5
PPT 15.6
PPT 15.7
C. Functions of Money
1. Money serves as a medium of exchange, making it easier for people
to buy and sell goods and services and reducing the need for
barter—the trading of one product or service for another of similar
can be complicated in multiple-party transactions.
2. Money serves as a measure of value, or a common standard for the
D. Characteristics of Money
1. Acceptability
money: People must believe in and trust the value of what they
use as money.
2. Divisibility
a. For money to function as a medium of exchange, it must be
easily moved and carried.
need.
4. Stability
a. Money must be stable and maintain its declared face value.
value, as during periods of inflation.
c. Instability destroys confidence in a nation’s money, and it will
ultimately lose acceptability.
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PPT 15.8
5. Durability
a. Because it is in continuous use, money must be durable in order
to maintain stability and acceptability. (Table 15.1)
6. Difficulty to Counterfeit
a. Money must be difficult to duplicate illegally in order to
maintain stability and acceptability.
b. Because modern technology makes it easier to counterfeit paper
money, most nations employ special papers and other
techniques to thwart counterfeiting.
c. Interestingly, although coins are much harder to counterfeit, it
costs more to make pennies and nickels than their face value!
(Table 15.2)
LO 15-2
Describe various types of money.
o Types of Money
• The American Financial System
PPT 15.10
PPT 15.11
E. Types of Money
1. Paper money and coins are the most visible types of money, but
there are many others.
2. A checking account (also called a demand deposit) is money stored
in an account that can be withdrawn without advance notice.
a. One way to withdraw funds is by writing a check, a written order
business the amount specified from funds on deposit. As legal
instruments, checks serve as a substitute for currency and are
preferred due to their low risk. (Figure 15.1)
b. A NOW (Negotiable Order of Withdrawal) account is an interest-
3. Savings accounts, also called time deposits, are funds in an interest-
earning account that usually cannot be withdrawn without advance
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PPT 15.14
PPT 15.15
4. Money market accounts are similar to interest-bearing checking
accounts but with more restrictions.
a. Generally, in exchange for higher interest rates, the owner of a
money market account can write only a limited number of
checks each month, and there may be a restriction on the
minimum amount of each check.
5. Certificates of deposit are savings accounts that guarantee a
depositor a set interest rate but require the funds to be left in the
6. Credit cards allow you to promise to pay at a later date by using
preapproved lines of credit granted by a bank or finance company.
b. Credit cards allow cardholders great flexibility in paying off their
purchases.
c. Credit cards may be issued by banks, travel and entertainment
companies, and retail store chains.
d. Credit card interest rates can be very high and consumer credit
card debt is a major cause for concern. Credit cards are one of
f. Credit card fraud: more and more computer hackers have
managed to steal credit card information and either use the
information for Internet purchases or making a card exactly the
same as the one stolen
1) Losses on credit card theft run into the billions
7. A debit card looks like a credit card but works like a check; use of a
products.
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Instructor’s Manual – Chapter 15
LO 15-3
Specify how the Federal Reserve Board manages the money supply
and regulates the American banking systems.
o The Federal Reserve System
PPT 15.16
connect
Need help
understanding how
the Federal Reserve
Tries to Stabilize the
tab for a brief
animated
explanation.
PPT 15.18
II. The American Financial System
A. The Federal Reserve System
1. The guardian of the American financial system is the Federal Reserve
Board, established by Congress in 1913 as an independent
government agency responsible for regulating the banking and
financial industry.
a. The Federal Reserve System is organized into 12 geographical
the United States.
2. The Federal Reserve Board has four major responsibilities:
a. To control the money supply with monetary policy.
3. Monetary Policy
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a) This tool is the most commonly employed.
much banks will lend. Because the reserve requirement
has such a powerful effect on the money supply, the Fed
does not change it often.
b) When the Fed wants to expand the money supply, it
lowers the discount rate; when it wants to decrease the
a. The second responsibility of the Fed is to regulate member
banking institutions.
monetary policy and competition between banks.
c. It determines which non-banking activities (brokerage services,
leasing, and insurance) are appropriate and which should be
prohibited among banks.
d. The Fed can also approve or disapprove mergers between banks
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5. Check Clearing
a. The Fed provides national check clearing for almost all checks
drawn on a bank in one city and presented for deposit at a bank
in a second city. The Fed also clears local checks.
b. The Check Clearing for the 21st Century Act (Check 21 Act) allows
banks to clear checks electronically by presenting an electronic
image of the check. Because of this, checks can often be
processed in a day.
6. Depository Insurance
a. The Fed is responsible for supervising the federal insurance
funds that protect the deposits of member institutions.
LO 15-4
Compare and contrast commercial banks, savings and loan
associations, credit unions, and mutual savings banks.
o Banking Institutions
PPT 15.23
B. Banking Institutions
1. Many banks today are hybrids in that they perform two or more
functions that were traditionally separated in the banking industry of
the past.
2. Commercial banks are the largest and oldest of all financial
institutions and rely mainly on checking and savings accounts as
their major source of funds for loans to businesses and individuals.
a. Banks today offer a number of services: consumer loans, credit
cards, safe-deposit boxes, trusts, and securities.
b. Legislation permits commercial banks to offer insurance and
investment banking products as well. This has placed U.S. banks
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PPT 15.26
d. High-risk banking and financial activities that contributed to the
financial crisis caused the government to pass the Dodd-Frank
Act. This Act imposed two major regulations on banks:
1) Raised the required capital banks had to hold on their
balance sheet
2) Limited certain kinds of high-risk activities
recent years after having almost collapsed during the 1980s.
b. Today they compete directly with commercial banks by offering
many types of services.
account.
b. Credit unions offer a wide variety of financial services
comparable to commercial banks.
6. Insurance for Banking Institutions
a. The Federal Deposit Insurance Corporation (FDIC) was created
in 1933 to provide an insurance fund that insures individual bank
funds, up to $250,000.
c. Savings and loan associations accounts were insured by the
Federal Savings and Loan Insurance Corporation (FSLIC) until it
became insolvent with the large-scale thrift failures in the 1980s.
It has since merged with the FDIC.
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PPT 15.27
PPT 15.24
e. These funds are intended to make people feel more secure
about their savings so that they won’t panic and withdraw them
during a crisis; their effectiveness seems to have been proven
during the many bank failures during the 1980s and 1990s.
1) Large bank failures occurred once again during the most
recent recession. More than 380 banks have failed between
2009 and 2011. While the future may yet bring unfortunate
surprises, most depositors go to sleep every night without
worrying about the safety of their savings.
2) JPMorgan Chase is the second largest commercial bank in the
United States behind Bank of America.
LO 15-5
Distinguish among nonbank institutions such as insurance companies,
pension funds, mutual funds, and finance companies.
o Nonbanking Institutions
o Electronic banking
PPT 15.29
C. Nonbanking Institutions
1. Diversified firms: Recently, a number of traditionally nonfinancial
firms have moved into the financial field.
a. General Motors and General Electric are examples
b. Many of these have been unsuccessful—it is best to “stick to
what you know.”
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a. Individual Retirement Accounts (IRAs) are a type of private
pension fund set up by individuals to provide for their
retirement needs; taxes on the interest earned are deferred
until withdrawal upon retirement.
b. The Roth IRA is similar to a traditional IRA, but the interest is tax-
free upon retirement because investors do not deduct their
contributions at the time they are made.
c. Most corporations provide some kind of pension plan for their
employees.
b. Mutual funds provide professional financial management for
people who lack the time and/or expertise to invest in particular
securities.
corporations, states, and municipalities
1) The new issue is called a primary market because the sale of
securities is for the first time. After the first sale, the
lender of last resort for individuals and businesses with less than
sterling credit.
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PPT 15.33
PPT 15.34
D. Electronic Banking
1. Electronic funds transfer (EFT) is the transfer of funds by means of
an electronic terminal, telephone, computer, or magnetic tape. The
most commonly used EFTs are automated teller machines,
automated clearinghouses, and home banking systems,
2. Automated teller machines (ATMs) are the most familiar form of
electronic banking and dispense cash, accept deposits, transfer
funds from one account to another, and display a customer’s
3. Automated clearinghouses (ACHs) permit payments such as direct
deposits or withdrawals to be made to and from a bank account by
magnetic computer tape.
b. The advantages of direct deposits for individuals include
convenience, safety, and potential interest earnings.
c. The advantages for businesses include decreased check–
processing expenses and increased employee productivity.
b. Increasingly sophisticated transactions can be carried out online.
c. Computers and telecommunications technology have
revolutionized world commerce.
banking customers by tricking them into visiting websites and
downloading malicious software that gives the hackers
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LO 15-6
Investigate the challenges ahead for the banking industry.
• Future of Banking
PPT 15.37
PPT 15.38
III. Future of Banking
A. Rapid advances in technology are forcing the banking industry to change.
1. More services than ever are available electronically and online.
B. The premise that banks will get bigger is now uncertain.
1. Due to the financial crisis, many large banks had a shrinking capital
base.
2. The Troubled Asset Relief Program had to step in and buy up $250
billion of senior preferred shares of bank securities.
3. Most large banks either needed to take a cash infusion from the U.S.
4. The government didn’t want to signal to the financial community
which banks were strong and which were weak to avoid a panic.
5. During this period, the Fed took the unprecedented actions of
buying up troubled assets from the banks and lending money at the
brokers.
C. The future of the banking system is in the hands of the U.S. Congress.
1. The Dodd-Frank Wall Street Reform and Consumer Protection Act
this type of problem in the future.
D. Shadow Banking refers to companies performing banking functions of
some sort that are not regulated by banking regulators
E. Peer-to-Peer lenders like Prosper, a company that matches investors and
help people raise funds for things as diverse as health care issues to
creative projects in art, film, games, and music
LO 15-7
Recommend the most appropriate financial institution for a
hypothetical small business.
A. Dr. Stephen Hill, a successful optometrist, developed his first saleable
product (a truly scratch-resistant and lightweight lens)