12 Flashcards
money
standard of value and a means of exchange or payment. can be anything accepted as a standard for payment.
modern society uses coins, currency, checks, and debit cards as part of the
monetary system : goods and services are directly exchanged using money. the seller can then take the money and exchange it for other goods and services.
without money, we would be forced to barter, or direct trading.
basic functions of money
- medium of exchange
anything that is generally accepted as a measure of value and wealth. - standard of value
standard: way to measure weight, amt, size, or value of smth. money measures value of goods and services - store of value
it holds value overtime and can be stored or saved. saved money can build wealth.
characteristics of money
money must be
1. stable in value
must have little if any change in value. item must be scarce, or else it will lose value if the supply is plentiful.
- accepted
ppl must agree and be willing to use it in exchange for goods - divisible into parts
- portable and durable.
- hard to counterfeit
to counterfeit is to make a copy in order to defraud
financial institution
firm that manages money, like a bank.
banks store money, transfer money, and lend money
how banks store money
to store : to place for preservation or later use.
bank account: record of how much money a customer has deposited into or withdrawn from a bank
types:
checking accounts: storing in short term, banks charge a fee
savings accounts: storing in long term, earns more interest than checking accounts
interest: rate that bank pays customers for keeping their money
storing it in a bank prevents u from losing it, spending it, or having it stolen easily.
how banks transfer money
banks use checks and electronic funds transfers to move money.
checks: primarily used to move money from one place or another
electronic funds transfer EFT: allows money to be transferred from one acc to another thru a network of computers
direct deposit; electronic transfer of payment directly from payers bank acc to party being paid. payroll checks are issued this way
how banks lend money
primary way banks make profits. the money u deposit makes it possible for the bank to lend money to others.
banks pay interest to customers on saving and vice versa on borrowed money.
banks use interest earned to pay customers in savings. most loans require a collateral :
property or goods pledged by a borrower to use as security against a loan if it is not repaid.
main types of loans
mortgage : agreement in which a borrower gives a lender rights to take the property if the loan is not repaid
mortgage loan: loan used to buy real estate
commercial loan: loan made to businesses to buy supplies and equipment.
individual loan: loan made to an individual for personal items
line of credit: credit arrangement where a financial institution agrees to lend a amt of money to be used at any time for any purpose
other financial services
financial advice
storing valuable items like jewelry and birth certificates
safe deposit box; box in banks vault used as a storage for customers valuables
debit cards and credit cards
trust departments that manage money
banks operate on
state, national, and international levels.
strict rules on starting banks bc they handle large sums of money. in the us, owner must meet requirements, apply for a charter, give evidence of capital
main types: commercial, saving and loan associations, credit unions
commercial banks
aka full service banks: offer entire range of banking services.
checking + savings accs, loans, advice
serves individs and businesses, authorized thru a charter or license granted by fed or state gov
to make a profit, they charge more on interest that they lend than they pay on savings accs
savings and loan associations
institutions that hold customers funds in interest-bearing accs and invest mainly in mortgage loans
og set up to offer loans and savings accs to encourage ppl to save and buy houses or start businesses
new regulation in 1980s: charge higher interest rates and offer more services.
many banks failed, so new regs passed: services offered by these now are v sim to commerical banks and credit unions
credit union
non profit banks set up by orgs for their customers to use.
credit union customers = members
offers credit cards, checking accs, low interest loans, high interest savings, many pay interest on checking accs
other institutions
mortgage companies: provide loans for buying homes and businesses
finance companies: offer short term loans to businesses and customers at much higher interest rates than banks
insurance companies: provide protection against fire and theft, offers loans for busi and custs
brokerage firms: sell stocks and bonds, offer a wide range of services
federal reserve system
central bank of the US, the fed, the bankers bank
set up in 1913, monitors the money supply and provides the us w a safe, flexible and stable financial and monetary system
made of 12 regional fed reserve banks and 25 branch banks, 5000 member banks.
run by board of governors
functions of fed reserve system
- clearing checks : funds and transferred from bank to bank w check
- acting as fed govs fiscal agent : distributes money to member banks and commercial banks + tracks deposits and holds checking acc for us treasury
- supervising member banks : regulates banks in the system
- reg money supply : determine money in circulation and either inc or dec it
- setting reserve reqs : member banks must keep a certain percentage of deposits as reserves (funds set for emergencies like rush of withdrawals)
- supplying paper currency : printing and maintaining us paper currency
