Chapter 8 Money & Banking

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Chapter 8 Money & Banking by Mind Map: Chapter 8 Money & Banking

1. What Makes Money, Money?

1.1. 3 Basic Functions: 1. Medium of Exchange 2. Standard of Value 3. Store of Value

1.2. 6 Characteristics: 1. Durable 2. Portable 3. Divisible 4. Limited in Supply 5. Uniformity 6. Accepted

1.3. Measurements of Money:  M1-  money circulating in the economy that includes cash  and assets that can be easily converted into cash. M2- money circulating in the economy that includes M1 plus less liquid deposits in various kinds of accounts or funds

2. How do American's Invest their Savings?

2.1. Investing Options

2.1.1. Bond is a loan in which the borrower promises to pay the lender a fixed rate of interest over the term of the loan and then repay the principal at the end of the term, or date of maturity.

2.1.2. Corporate bonds are riskier to invest in than government bonds. Should the corporation issuing the bond fail, the bondholders could lose some or all of their investments.

2.1.3. Junk bonds a low-quality corporate bond that earns a relatively high rate of interest based on its higher risk.

2.1.4. Stocks: an investment that represents ownership in a business

2.1.5. A mutual fund: a collection of securities chosen and managed by a group of professional fund managers is a collection of securities chosen and managed by a group of professional fund managers. Shares in a mutual fund can be bought and sold much like shares of stock. Mutual funds are popular with investors as a way of achieving diversification.

2.2. Risk and Return

2.2.1. Bank savings accounts, CDs, and government bonds offer the lowest risk but also the lowest rate of return.

2.2.2. Mutual Funds are considered to be a medium risk and medium return. They are generally professionally managed diversified stock collections that are intended to grow over time without a lot of risk.

2.2.3. Stocks are the highest level of risk and offer the highest potential profit for the investor.

2.3. How to invest

2.3.1. When you're younger, invest in riskier ventures. As you get older tapper off your riskiness.

3. How is saving important to the economy and you?

3.1. Helps the economy grow

3.2. Reaching Personal goals

3.3. Fund Retirement

3.3.1. Social Security is a government program that provides cash payments to retired workers. It is funded by taxes paid by workers and their employers. Social Security is a pay-as-you-go plan. This means that the Social Security taxes you pay each year are not saved for your future retirement. Instead, this money is paid out in benefits to current retirees.

3.3.2. Company Retirement Plans: At one time, most large companies offered pension plans to their employees. A pension plan is a retirement plan to which the employer makes contributions for the future benefit of its employees.

3.3.3. Personal savings: The third source of retirement funds is personal savings. Such savings may include a variety of financial assets, including private retirement plans—plans that are not employer-sponsored.

3.4. Weather hard times

4. How does the Banking System Work?

4.1. Banks Keep reserves only a fraction of deposits

4.1.1. Most hold on to a fraction and lend out the rest.

4.1.2. Excess reserves are the source of loans and the money creation and function the banking system.

4.1.3. FED sets the rate for legal reserves

4.2. Given depositors would not withdraw often

4.3. Features

4.3.1. 1. Bank profitability: Banks earns the spread of interest rate

4.3.2. 2. Bank discretion over money supply: Create Money

4.3.3. 3. Exposure to bank runs: Keep prudency and lend out money carefully.