Chapter 6 Consumers Savers Investors s l a

>>>> Chapter 6 Consumers, Savers & Investors

s l a o G g Learnin 1 Outline the structure and importance of the financial system. List the various types of securities. 5 Discuss the organization and functioning of financial institutions. 6 Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit. 2 3 Define financial market, and distinguish between primary and secondary financial markets. 7 Describe the characteristics of the major stock exchanges. 4 Evaluate the major features of regulations and laws affecting the financial system. 8 Describe the global financial system.

s r e v a S & s r e d n Spe Teens spent $159 billion in 2005! Almost 2/3 s was spent on consumer goods & services

t c u d o r P c i t s e m o D s s Gro • GDP is the final value of all goods & services produced in the country in one year • If a country can increase its GDP it will see an increase in its standard of living • The U. S. has the highest GDP in the world (it produces more goods & services than any other country)!

e m o c n I f o s e c r u So • 2 Main Sources: – Income from work: Paid by wage (hourly or by unit of production) or by a salary (paid weekly, monthly or yearly) – Income from wealth • Wealth is the value of the things you own. • Net worth is a person’s wealth after debts & other obligations have been subtracted • Use your wealth (interest) as income too!

e m o c n I f o Types • Disposable Income (or net pay) is the money you take home after taxes are paid (As a whole most Americans spent more than their disposable income in 2006!) • Discretionary income is what may be spent on extras

g n i t c e f f Factors A Savings • Income -People save & invest more as income • Expectations - What people think, or hope, will happen in the future • Current interest rates – higher interest promotes saving; lower interest does not • Taxes – tax rates encourage or discourage savings

Budget • A budget can help you save money 3 Steps in preparing a budget: 1. Setting financial goals 2. Estimating income 3. Planning expenditures (a spending plan)

g n i s i t r e v Ad • Informs consumers, creates competition (lower prices) & pays for TV & newspapers • Advertising is expensive & can raise prices, it can lead people to buy things they don’t need and businesses may not be objective because they support TV & newspapers

g n i v a S r o f s r o t c a 3 F • Safety - offers protection from risks • Rate of return - “the higher the risk, the greater the return. ” • Liquidity – how easily it can be converted to cash - The more liquid, the less the rate of return

s g n i v a S f Types o • Savings Deposits – low risk, very liquid, low interest • Certificate of Deposit (CD) – pays more interest because you agree to deposit money in an account for a specific time period • Money Market Deposit Accounts – interest -bearing checking account; your money is used in the money market

s t n e m t s e v n I f o s e p Ty • Pension & Retirement Funds – These provide tax deferment (payment of taxes on interest after the interest is earned) • Corporate Stocks - shares of ownership in a corporation; most pay dividends & provide a way to invest to earn money over many years (if they appreciate) • Corporate bonds – IOUs to allow business expansion

s t n e m t s e v n I f o s e p Ty • Mutual fund – a pool of money used by a company to buy assets (stocks or bonds) • U. S. savings bonds – one of the safest investments which allow the Federal government to borrow money • Risk is associated with investment but it can provide income for retirement!

? t i d e r c What is • Credit – the ability of a customer to buy goods & services now and pay for them later • Principal – the amount originally borrowed • Finance charge – the total amount paid to use credit • Annual Percentage Rate (APR) – is the cost of credit calculated as an annual percentage of the principal borrowed

t i d e r c f o s e g a t Advan • • • Immediate possession Flexibility Safety Emergency funds Character reference

t i d e r c f o s e g a t n a v d Disa • Overspending • Higher cost • Impulse buying

t i d e r C g n i a t b O • The 3 C’s of Credit Worthiness: 1. Character – honesty & willingness to repay debts 2. Capacity – your ability to repay debts 3. Capital – or collateral is what people own

n o i t c e t o r P r e m u s n Co • In 1962 President John F. Kennedy’s proposed a consumer “bill of rights” to Congress: 1. The right to safety 2. The right to be informed 3. The right to choose 4. The right to be heard

t i s o p e D Federal e c n a r u s n I • Enacted by the Banking Act of 1933 • Restore public confidence in the banking system • Before deposit insurance, runs were common as people rushed to withdraw their money from the bank • Deposit insurance shifts the risk of bank failures from individuals to the FDIC

d n a s k n a B s g n i v a S s n o i n U t i d Cre • Offer a variety of consumer services • 85% of their loans are real estate loans • Credit unions are cooperative financial institutions that are owned by depositors/members. • Credit unions are created to serve consumers. – Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC

y r o t i s o p e Non D s n o i t u t i t s n I l a i c n a Fin ü Insurance Companies ü Pension Funds ü Finance Companies

l a r e d e F e h t f o e l o The R Reserve • Created In 1913 • Central bank of the United States • Regulate commercial banks • Perform banking-related activities for the U. S. Department of Treasury • Providing services for banks • Setting monetary policy

e h t f o n o i Organizat e v r e s e R l Federa • 12 Federal reserve districts – Own federal reserve bank • District banks are run by a nine-member board of directors. • The board of governors is the governing body. • Politically independent • Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates.

g n i r a e l C k Chec the Fed and • Americans still write billions of paper checks. • The process by which funds are transferred from the check writer to receiver • The multiple-step process is managed and cleared by the FED. • The Check Clearing for the 21 st Century Act is making this process more electronic.

y c i l o P y r Moneta • Supply of money and credit • Measures of the money supply: M 1 & M 2 • The FED requires banks to maintain reserves. • Set the discount rate • Open Market Operations

c i h p a r G M 1 & M 2

e h t f o n o Regulati m e t s y S l a i Financ • Bank Regulation • Government Regulation of the Financial Markets • Industry Self-Regulation – Rules of conduct by professional organizations like National Association of Securities Dealers – Market Surveillance

: m e t s y S l a The Financi e v i t c e p s r e Global P A • The financial system is more connected. • Financial institutions are more global. • Only 3 of the 30 largest banks in the world are US institutions. • Most nations have a central bank.