CHAPTER 20 – MONEY, FINANCIAL INSTITUTIONS, AND THE
FEDERAL RESERVE
LEARNING GOALS
After you have read and studied this chapter, you should be able to:
1. Explain what money is and what makes money useful.
2. Describe how the Federal Reserve controls the money supply.
3. Trace the history of banking and the Federal Reserve System.
4. Classify the various institutions in the American banking system.
5. Briefly trace the causes of the banking crisis of 2009-2010 and explain how the government protects your funds during such crises.
6. Describe how technology helps make banking more efficient.
7. Evaluate the role and importance of international banking the World Bank and the International Monetary Fund.
LEARNING THE LANGUAGE
Listed below are important terms found in the chapter. Choose the correct term for the definition and write it in the space provided.
Banker’s acceptance / Federal Deposit Insurance Corporation (FDIC) / Open-market operationsBarter / International Monetary Fund (IMF) / Pension funds
Certificate of deposit (CD) / Letter of credit / Reserve requirement
Commercial bank / M-1 / Savings and Loan Association (S&L)
Credit unions / M-2 / Savings Association Insurance Fund (SAIF)
Debit card / M-3 / Smart card
Demand deposit / Money / Time deposit
Discount rate / Money supply / World Bank
Electronic funds transfer (EFT) system / Nonbanks
1. Nonprofit, member-owned financial cooperatives called______offer the full variety of banking services to their members.
2. M-2 plus big money deposits like institutional money market funds make up the ______money supply.
3. The ______is a percentage of commercial banks’ checking and savings accounts that must be physically kept in the bank.
4. The technical name for a savings account is a ______, for which the bank can require prior notice before the owner withdraws money.
5. A ______is a promise that the bank will pay some specified amount at a particular time.
6. ______is anything that people generally accept as payment for goods and services.
7. The interest rate the Fed charges for loans to member banks is the ______.
8. Financial organizations known as ______accept no deposits, but offer many of the services provided by regular banks include pension funds, insurance companies, commercial finance companies, consumer finance companies and brokerage houses.
9. A time deposit (savings) account called a ______earns interest to be delivered at the end of the certificate’s maturity date.
10. A computerized system known as ______electronically performs financial transactions such as making purchases, paying bills, and receiving paychecks.
11. The part of the FDIC that insures holders of accounts in savings and loan associations is called the ______.
12. An electronic funds transfer tool known as a ______serves the same function as checks, in that it withdraws funds from a checking account.
13. The activity called ______is the direct trade goods and services for other goods and services.
14. A financial institution called a ______accepts both savings and checking deposits and provides home mortgage loans.
15. The ______is the amount of money the Federal Reserve Bank makes available for people to buy goods and services.
16. A ______is a promise by a bank to pay the seller a given amount if certain conditions are met.
17. ______are amounts of money put aside by corporations, nonprofit organizations, or unions to cover part of the financial needs of members when they retire.
18. A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and then uses some of these funds to make loans is called a ______.
19. The ______is an independent agency of the U.S. government that insures bank deposits.
20. The buying and selling of U.S. government bonds by the Fed is called______and has the goal of regulating the money supply.
21. The ______includes everything in M-1 plus money that may take a little more time to obtain, such as savings accounts, money market accounts, mutual funds, and certificates of deposit.
22. The technical name for a checking account is a(n) ______, from which money can be withdrawn anytime on demand by the depositor.
23. The ______assists the smooth flow of money among nations.
24. The ______, also known as the International Bank for Reconstruction and Development, is primarily responsible for financing economic development.
25. Money that can be accessed quickly and easily, such as currency, checks, traveler’s checks, is called the ______money supply.
26. A ______is an electronic funds transfer tool that is a combination credit card, debit card, phone card, driver’s license card and more.
ASSESSMENT CHECK
Learning Goal 1
Why Money Is Important
1. What is a “barter exchange”?
2. Describe five characteristics of a "useful" form of money.
a. ______
b. ______
c. ______
d. ______
e. ______
3. What is e-cash and how can you use it?
Learning Goal 2
What is the Money Supply?
4. What are M-1, M-2 and M-3, and what is the difference between them?
Which is the most commonly used definition?
5. What would happen if the Fed were to make too much money available in the economy?
6. What would happen if the Fed took money out of the economy?
7. Why does the money supply need to be controlled?
8. What does a “falling dollar” mean?
What does a rising dollar mean?
What does this mean for the prices of European goods?
9. What makes our dollar “weak” or “strong”?
10. When the economy is strong the demand for dollars: ______
When the economy is weak the demand for dollars: ______
So the value of the dollar depends upon: ______
11. What organization is in charge of monetary policy?
12. What are the five major parts of the Federal Reserve System?
a. ______
b. ______
c. ______
d. ______
e. ______
13. What is the primary function of the board of governors?
14. Describe the Federal Open Market Committee.
15. What are some activities of the Federal Reserve?
a. ______
b. ______
c. ______
d. ______
e. ______
f. ______
g. ______
16. The three basic tools the Fed uses to manage the money supply are:
a. ______
b. ______
c. ______
17. Which of the three tools the Fed uses to manage the money supply is:
a. most commonly used: ______
b. most powerful: ______
18. Describe what happens in the economy when the Fed increases the reserve requirement.
What is the result of a decrease in the reserve requirement?
19. When using open market operations, what actions does the Fed take when it wants to:
a. decrease the money supply: ______
______
b. increase the money supply: ______
______
20. Why is the Fed often called the banker’s bank?
21. An increase in the discount rate by the Fed: ______
______
A decrease in the discount rate by the Fed: ______
______
22. What is the federal funds rate?
23. Why do banks encourage forms of payment when customers are making purchases outside of their local area?
Learning Goal 3
The History of Banking and the Need for the Fed
24. Why were colonists forced to use barter for goods?
25. Why did Massachusetts begin issuing its own paper money?
Why did this continental currency become worthless?
26. Land banks were established to ______.
27. Describe the evolution of the “central bank.”
28. Describe the state of banking by the time of the Civil War.
29. The Federal Reserve System was designed to______.
30. What led to the bank failures of the 1930’s?
31. What actions did congress take in 1933 and 1935 to strengthen the banking system?
Learning Goal 4
The U.S. Banking System
32. Identify four types of banking institutions.
a. ______
b. ______
c. ______
d. ______
33. What kinds of institutions are included in a list of nonbanks?
a. ______
b. ______
c. ______
d. ______
e. ______
34. What are two types of customers for commercial banks?
a. ______
b. ______
35. How does a commercial bank make a profit?
36. Describe the characteristics of a certificate of deposit (CD) including how interest rates are determined.
37. Identify the services offered by commercial banks in addition to checking (demand deposits) and savings accounts (time deposits):
a. ______g. ______
b. ______h. ______
c. ______i. ______
d. ______j. ______
e. ______k. ______
f. ______l. ______
38. What services are being offered through ATMs?
39. What is another name for savings and loans institutions, and why are they known as such?
40. Why did so many S&Ls fail between 1979 and 1983?
41. In the 1980s The federal government stepped in to strengthen S&Ls by permitting them to:
a. ______
b. ______
c. ______
d. ______
42. What services do credit unions offer their members?
43. What has been the result of competition between nonbanks and banks?
44. What financial services are offered by:
a. Life insurance companies ______
______
b. Pension funds ______
______
c. Brokerage firms ______
______
d. Commercial and consumer finance companies______
______
Learning Goal 5
The Current Banking Crisis and How the Government Protects Your Money
45. Why do some people believe the Fed was responsible for the recent banking crisis?
46. Describe mortgage backed loans and how they contributed to the crisis.
47. How did the Fed contribute to the problems created by mortgage backed loans when home values began to decline?
48. In the end, the blame for the banking crisis can be placed on:
a. ______
b. ______
c. ______
d. ______
e. ______
49. List the three major sources of financial protection
a. ______
b. ______
c. ______
50. In the case of a bank failure the FDIC : ______
______
______
51. Why were the FDIC and the FSLIC created?
52. How was SAIF formed?
53. What does the NCUA provide for?
Learning Goal 6
Using Technology to Make Banking More Efficient
54. One solution banks have used to reduce the cost of processing checks is to:
______
The most efficient way to transfer funds is: ______
55. The benefit of electronic funds transfer is that: ______
______
56. What are “Go-Tags”?
57. How is a debit card different from a credit card?
What is a drawback of a debit card compared to credit cards?
58. What are payroll debit cards and how do they work?
59. How are smart cards different from other cards?
60. What is:
a. direct deposit? ______
______
b. direct payment? ______
______
61. What banking services are available to customers through online banking?
62. Benefits online banks can offer to customers include: ______
______
63. How have customers responded to Internet banks? Why?
64. In banking the future seems to be______
______
Learning Goal 7
Leaders in International Banking and Banking Services
65. What three services are offered to banks to help businesses conduct business overseas?
a. ______
b. ______
c. ______
66. What could be the international impact of the Federal Reserve System changing interest rates?
67. The net result of international banking and finance has been: ______
______
______
______
68. The World Bank is primarily responsible for: ______
69. The World Bank now lends most of its money to ______
______
70. What criticisms have been aimed at the World Bank?
71. What is required by the International Monetary fund?
a. ______
b. ______
c. ______
72. What is the IMF designed to oversee? What is the goal of the IMF?
73. Why is the IMF running out of money?
CRITICAL THINKING EXERCISES
Learning Goals 1,2
1. Using what you have learned in this chapter as well as in other chapters about economics, answer this question: What is the importance of the stability of the value of money, and controlling the money supply in the international marketplace today?
2 Sun-2-Shade is a company that makes self-darkening windshields for the automotive industry. Sun-2-Shade has made it big! The company has done so well here in the U.S. that management is seriously considering expanding into overseas markets. It is your job to research the idea, and you want to begin by helping other top managers understand some of the considerations of "going global.” Within the context of the "value" of money compared to other currencies, what are some of the issues you will want to bring up to your managers?
Learning Goal 2
3. The Fed uses three major tools to control the money supply
Reserve requirement
Open market operations
Discount rate
a. Complete the following chart illustrating how each tool is used, and its effect on the money supply and the economy:
EFFECT ON EFFECT ON
TOOL ACTION MONEY SUPPLY ECONOMY
Reserve Increase reserve ______
requirement requirement
Decrease reserve ______
requirement
Open market Buy government ______
Operations securities
Sell government ______
securities
Discount rate Increase discount ______
rate
Decrease discount ______
rate
b. Identify whether the Federal Reserve would increase or decrease the money supply in the following situations, and what the effect would be .
1. High unemployment ______
2. High rates of inflation ______
4. When the Fed regulates the money supply using one of the three tools just mentioned, what happens to interest rates overall?
Learning Goal 3
5. The American banking system has a long history. List the major events that led up to the establishment of the Federal Reserve System, and subsequent events that have affected the American banking system.
a. ______
b. ______
c. ______
d. ______
e. ______
f. ______
g. ______
h. ______
i. ______
j. ______
k. ______
l. ______
Learning Goal 4
6. The American banking system consists of three types of organizations:
Commercial banks
Savings and loans
Credit unions
Match each of the following descriptions to the correct type of institution:
a. ______Offers interest-bearing checking accounts called share draft accounts at relatively high rates.
b. ______Also known as thrift institutions.
c. ______Offer a wide variety of services, to depositors and borrowers, including ATMs, credit cards, short and long term loans, financial counseling, automatic payment of telephone bills, safe deposit boxes, tax deferred individual retirement accounts, overdraft checking account privileges.