💼Intro to Business Unit 15 – Money and Financial Institutions

What's Money All About?

• Money serves as a medium of exchange facilitates transactions for goods and services
• Acts as a store of value maintains purchasing power over time
• Functions as a unit of account provides a standard measure for pricing goods and services
• Characteristics of money include durability, portability, divisibility, uniformity, limited supply, and acceptability
• Fiat money is backed by the government's declaration that it is legal tender (U.S. dollars)
• Commodity money has intrinsic value based on the material it is made from (gold coins)
• Money supply measures the total amount of money in circulation in an economy
  • M1 includes currency, demand deposits, and other liquid deposits
  • M2 includes M1 plus savings deposits, money market funds, and small time deposits

Types of Financial Institutions

• Commercial banks offer a wide range of services, including checking and savings accounts, loans, and credit cards
• Investment banks focus on underwriting securities, mergers and acquisitions, and providing financial advice to corporations and governments
• Credit unions are member-owned, not-for-profit institutions that offer similar services to banks but often have lower fees and better interest rates
• Savings and loan associations (S&Ls) specialize in accepting savings deposits and making mortgage loans
• Insurance companies provide protection against financial losses due to events such as accidents, illnesses, and natural disasters
• Brokerage firms facilitate the buying and selling of securities, such as stocks and bonds, on behalf of their clients
• Financial technology (fintech) companies use innovative technology to provide financial services, such as mobile banking and peer-to-peer lending

How Banks Work

• Banks accept deposits from customers and use those funds to make loans to other customers, earning a profit on the interest rate spread
• Fractional reserve banking allows banks to lend out a portion of their deposits while keeping a fraction in reserve to meet withdrawal demands
• The reserve requirement is the minimum percentage of deposits that banks must hold in reserve, set by the Federal Reserve
• Banks create money through the process of lending, as loans are deposited into borrowers' accounts, increasing the money supply
• Bank capital serves as a buffer against losses and ensures the bank's solvency
  • Tier 1 capital includes common stock, retained earnings, and certain preferred stock
  • Tier 2 capital includes subordinated debt and certain loan loss reserves
• Banks manage risk through diversification, credit analysis, and risk-based pricing of loans
• Regulation ensures the safety and soundness of the banking system and protects consumers (Federal Deposit Insurance Corporation)

The Federal Reserve and Monetary Policy

• The Federal Reserve (Fed) is the central bank of the United States, responsible for conducting monetary policy and regulating the banking system
• The Federal Open Market Committee (FOMC) sets monetary policy by targeting the federal funds rate, the interest rate at which banks lend to each other overnight
• Open market operations involve the Fed buying or selling government securities to influence the money supply and interest rates
• The discount rate is the interest rate the Fed charges banks for short-term loans through the discount window
• Reserve requirements are the minimum percentage of deposits that banks must hold in reserve, set by the Fed
• The Fed's dual mandate is to promote maximum employment and stable prices
• Expansionary monetary policy aims to stimulate economic growth by lowering interest rates and increasing the money supply
• Contractionary monetary policy aims to slow inflation by raising interest rates and decreasing the money supply

Other Financial Services and Products

• Insurance protects individuals and businesses against financial losses due to events such as accidents, illnesses, and natural disasters
  • Life insurance provides financial protection for beneficiaries in the event of the policyholder's death
  • Health insurance covers medical expenses and can be provided by employers or purchased individually
  • Property and casualty insurance covers losses to property and liability for injuries or damage to others
• Investment products help individuals and businesses grow their wealth over time
  • Stocks represent ownership in a company and provide the potential for capital appreciation and dividends
  • Bonds are debt securities that pay regular interest and return the principal at maturity
  • Mutual funds pool money from many investors to purchase a diversified portfolio of securities
• Retirement accounts provide tax advantages and help individuals save for retirement
  • 401(k) plans are employer-sponsored retirement accounts that allow employees to make pre-tax contributions
  • Individual Retirement Accounts (IRAs) are personal retirement accounts with tax benefits, such as traditional and Roth IRAs
• Payment services facilitate transactions and money transfers
  • Credit cards allow consumers to make purchases and pay later, often with rewards programs
  • Debit cards enable consumers to make purchases by directly accessing their bank account funds
  • Mobile payment apps (Venmo) allow users to send and receive money using their smartphones

The Role of Money in the Economy

• Money facilitates the exchange of goods and services, enabling specialization and trade
• The money supply influences economic growth and inflation
  • An increase in the money supply can stimulate economic activity by lowering interest rates and encouraging borrowing and spending
  • Excessive money supply growth can lead to inflation, eroding the purchasing power of money
• The velocity of money measures how quickly money changes hands in an economy and affects the relationship between money supply and economic activity
• Monetary policy is used to manage the money supply and interest rates to promote economic stability and growth
• The demand for money is influenced by factors such as income, interest rates, and expectations of future prices
• The quantity theory of money states that the money supply multiplied by the velocity of money equals the price level multiplied by the quantity of goods and services produced
• The interest rate represents the cost of borrowing money and the return on saving, influencing investment and consumption decisions

Current Trends and Challenges

• Digital currencies, such as Bitcoin, are emerging as potential alternatives to traditional fiat money
• Mobile banking and fintech are changing the way consumers access and use financial services
• Cybersecurity threats pose risks to the financial system, requiring robust security measures and regulations
• Income and wealth inequality are growing concerns, with implications for financial stability and economic growth
• Climate change and environmental risks are increasingly influencing financial markets and investment decisions
• Globalization has increased the interconnectedness of financial markets, amplifying the potential for systemic risk
• Demographic shifts, such as an aging population, are affecting savings and investment patterns and the demand for financial services

Key Takeaways and Real-World Applications

• Understanding the functions and characteristics of money is essential for making informed financial decisions
• Choosing the right financial institution and products depends on individual needs and goals
• Banks play a crucial role in the economy by facilitating the flow of funds and creating money through lending
• The Federal Reserve's monetary policy decisions have far-reaching effects on interest rates, economic growth, and inflation
• Diversifying investments across different asset classes (stocks, bonds) can help manage risk and achieve long-term financial objectives
• Staying informed about current trends and challenges in the financial system is important for adapting to a changing economic landscape
• Developing good financial habits, such as budgeting, saving, and investing, can lead to greater financial security and success
• Seeking professional financial advice can help individuals and businesses navigate complex financial decisions and achieve their goals