ECONOMICS TOPIC 6 LESSON 4

ECONOMICS TOPIC 6 LESSON 4

The Functions of Modern Banks

ESSENTIAL QUESTION

HOW CAN YOU MAKE YOUR MONEY WORK FOR YOU?

OBJECTIVES

Identify different types of financial institutions, and the services they provide.

Explain the benefits provided by financial institutions in the context of our free enterprise system.

Describe the development of electronic banking.

The Money Supply

Currency is money. So are traveler’s checks, checking account deposits, and a variety of other components. All of these components make up the United States money supply. To more easily keep track of these different kinds of money, economists divide the money supply into several categories. The main categories are called M1 and M2

M1

M1 represents money that people can gain access to easily and immediately to pay for goods and services. In other words, M1 consists of assets that have liquidity, or the ability to be used as, or directly converted into, cash.

M2

M2 consists of all the assets in M1 plus several additional assets. These additional M2 funds cannot be used as cash directly but can be converted to cash fairly easily. M2 assets are also called near money.

Multiple Choice

Check Understanding Which of the following statements about M1 assets is true?

• M1 assets cannot be converted into cash easily.

• M1 assets are stored in savings accounts.

• M1 assets can be converted into cash easily.

• M1 assets do not have liquidity.

Functions of Financial Institutions

Storing Money Banks provide a safe, convenient place for people to store money.

Saving Money Banks offer a variety of ways for people to save money. Four of the most common ways are savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs).

Functions of Financial Institutions

Making Loans Banks also perform the important service of providing loans. 

Mortgages A mortgage is a specific type of loan that is used to buy real estate. 

Functions of Financial Institutions

Credit Cards Another service that banks provide is issuing credit cards—cards entitling their owners to buy goods and services based on the owners’ promises to pay

Functions of Financial Institutions

Interest is the price paid for the use of borrowed money. The amount borrowed is called the principal.

Making a Profit The largest source of income for banks is the interest they receive from customers who have taken loans. 

Multiple Choice

Identify What is a family most likely to do if they want to purchase a home?

• use a credit card

• get a mortgage

• open a checking account

• purchase a certificate of deposit

Types of Financial Institutions

• Commercial Banks

• Savings and Loan Associations

• Savings Banks

• Credit Unions

• Finance Companies

Commercial Banks

Commercial banks, which traditionally served businesses, offer a wide range of services today. Commercial banks offer checking accounts, accept deposits, and make loans to businesses and to individuals. 

Savings Banks

Mutual savings banks (MSBs) originated in the early 1800s to serve people who made smaller deposits and transactions than commercial banks wished to handle. Mutual savings banks were owned by the depositors themselves, who shared in any profits.

Credit Unions

Credit unions are cooperative lending associations usually established by and for particular groups, usually employees of a specific firm or government agency.

Savings and Loan Associations

Savings and loan associations (S&Ls), were originally chartered to lend money for building homes during the mid-1800s. Members of S&Ls deposited funds into a large general fund and then borrowed enough money to build their own houses.

Finance Companies

Finance companies make installment loans to consumers. These loans spread the cost of major purchases such as computers, cars, and large appliances over a number of months. Because people who borrow from finance companies more frequently fail to repay the loans, finance companies generally charge higher interest rates than banks do.

Multiple Choice

Identify Which type of financial institution plays the largest role in the economy?

• credit unions

• savings banks

• savings and loan associations

• commercial banks

Electroninc Banking

• Credit Cards

• Debit Cards

• Home Banking

Credit Cards

These cards come with a Annual Percentage Rate (APR) from 0-36%. They allow you to essentially take out a loan when you like. The draw back is that you can easily be overcome by debt.

Debit Card

Is a card that allows you to access your bank account without the burden of carrying cash. The drawback is that scammers can steal your card information using electroniic devices and gain access to your account.

Home Banking

Is a way to Bank without entering the bank. This can provide ease of access to your accounts. The drawback is your account nformation being stolen by hackers.

Gift Cards and Sored Value Cards

These cards are like debit cards where they have a limited value. The main value is that your personal data is safe.

Multiple Choice

Identify Which would somebody use to withdraw money from a checking account?

• stored-value card

• debit card

• credit card

• gift card

Open Ended

HOW CAN YOU MAKE YOUR MONEY WORK FOR YOU?