Money and Banking Industry
By: Meghan Krishnan
What is Money?
A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
What are the three uses of Money?
Medium of exchange: money can be used for buying and selling goods
Unit of account: measures relative worth and value of a good and service
Store of value: convenient way to store wealth
What are the six characteristics of money?
- Durability: Must withstand physical wear and tear that is a part of being used over and over again
- Portability: People need to be able to take money with them from place to place
- Divisibility: Money must be easily divided into small denominations
- Uniformity: Money must be uniform, easy to count and measure
- Limited Supply: The money supply must be kept in limited supply
- Acceptability: Everyone in an economy must be able to exchange the objects that serve as money
What are the sources of money's value?
- Commodity Money: consists of objects that have value in and of themselves and that are also used in money
- Representative Money: Makes use of objects that have value because that holder can exchange them for something of value
- Fiat Money: This is an order or decree. It is also called "legal tender"
What is the source of value for the money in the United States economy?
- Fiat Money
- Any money declared by a government to be legal tender
- State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard
- Intrinsically valueless money used as money because of government decree
History of banking
What was the role of the first bank of the united states created in 1791?
The First Bank of the United States was needed because the government had a debt from the Revolutionary War, and each state had a different form of currency
What is the Federal Reserve? What is the role of the Federal Reserve today?
Federal Reserve: the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system
- Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
- Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
- Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems
How do economists measure money supply today?
M1: This measurement of the money supply includes only fiat money (paper currency and coins) and demand deposits like checking accounts. M1 represents the portion of the money supply with the highest liquidity
M2: consists of fiat money, demand deposits, and near money
What is the current U.S. money supply?
What Services do banks provide?
If you give your money to a bank, it not only protects it but pays you interest so that it can work with the money. Banks also lend money to other businesses and customers. They collect extra money called banking fees with which they pay interest to savers as well as salaries for their workers. Banks make a profit because they collect more interest than they pay to savers
How do banks make a profit?
Banks use depositors' money to make loans. The amount of interest the bankscollect on the loans is greater than the amount of interest they pay to customers with savings accounts—and the difference is the banks'profit
What are the different types of financial institutions?
- Commercial banks
- Investment banks
- Insurance companies
- Investment companies
How has electronic banking affected the banking world?
- Limits teller interactions
- 24-hour access
- Increase in criminal activity
- Financial integration