Econ Unit 4 Vocabulary - Financial Institutions and Interest Rates

Fiat Money

official money used by the government

3 Functions money must serve

Medium of Exchange, Store of Value, and Unit of Account (Standard of Value)

Medium of Exchange

facilitates transactions between individuals, businesses, financial institutions, and governments in the economy

Store of Value

when people hold money as savings for purchases sometime in the future (savings)

Unit of Account

tool of comparison that allows us to compare prices and determine whether we have enough in our account to make a particular purchase

Federal Reserve System

central bank for the United States

Federal Reserve’s Unique Qualities

it is both a private and public institution

Private 

District Banks 

Public

Board of Governors

Chairman of the Fed

Jerome Powell

Federal Open Market Committee (FOMC)

monetary policy making body of the Federal Reserve System 

3 Jobs of the Fed

Payment Processing, Banking Supervision, and Monetary Policy

Payment Processing

the Fed maintains accounts for commercial banks and the Federal government, process checks, and electronically transfer funds. Distributes and receives currency and coin, and keeps currency in good condition and in circulation

Banking Supervision

the Fed writes regulations that govern the operations and business of banks and other financial institutions

Monetary Policy

how the Fed influences the economy to achieve maximum employment and price stability

Fed Dual Mandate

uses its tools to maintain Price Stability and Maximum Employment

Federal Funds Rate

the interest rate on overnight loans between banks and other entities that have reserve deposits in the Fed

FOMC Meeting

members vote to raise, lower, or maintain their target for an interest rate (FFR)

Open Market Operations

when the Fed buys or sells bonds

Two Phases of Monetary Policy

Expansionary and Contractionary

Expansionary

used during a recession, FOMC buys bonds, votes to lower FFR which lowers interest rates and increases the money supply

Contractionary

used during inflation, FOMC sells bonds, votes to raise FFR which raises interest rates, lowering the money supply

Spread

difference between interest charged and interest earned

4 Examples of Financial Institutions

banks, credit unions, payday lenders, and title pawn lenders

Banks

provide a safe means to store earnings, offering direct deposits, check-writing services, debit and credit cards, loans of all sorts, and a variety of other services

Credit Unions

nonprofit institutions that only provide services to and share dividends with its members, offer higher interest rates on deposits and lower interest rates on loans than banks (lower interest rate on loans, higher interest rates on savings)

Payday Loan Company

gives out small loans in return for a portion of the upcoming paycheck, generally charges much higher interest on loans than other institutions

Title Pawn Leader

provide short term loans to individuals facing a gap between their income and expenses, they make loans based on an individuals collateral (car) the fees are usually much higher than those a bank would charge and can be predatory

Interest Rates

higher interest rates may encourage more savings and lower interest rates may encourage more buying

Annual Percentage Rate (APR)

the yearly interest rate applied to a loan or credit card

Best to Worst Interest Rates

1- Credit Union, 2- Banks, 3- Payday, 4- Title Pawn

Ammortization

graph/table that shows loan terms

Simple

savings (interest earned), the bank is paying interest only on the money the customer has actually put in the bank, preferred for loans

Compound

savings (interest earned), the bank pays the customer on the account amount in the account, meaning they are paying interest on what the customer put in AND what the bank has already given them, preferred, grows quickly

Fixed

loans (interest charged), during the time of the loan, the interest rate will not change until the money is repaid, preferred

Variable

a certain interest rate is guaranteed for a period of time, NOT during the duration of the loan, credit card

Savings Accounts

least risky, put in savings for easy access

529 Accounts

specified for education, tax deferred account

Certificates of Deposit

savings for 1 month to 10 years, pay a fee for early withdrawal

US Treasury Bond

loaning the government money in return for a guaranteed rate of return

Stock Mutual Fund

provide more protection against loss because the investment is spread across many companies

Stocks

more risk, rate of return is likely lower

Retirement Accounts

401K and 403B

401K

most common, the money is only taxed going out

403B

only for school employees and nonprofits

Roth IRA

preferred, the person gets no tax break on the $1,000 they put in this year, but withdrawal isn’t taxed

IRA

you pay taxes on the money coming out of the account

Diversification

means you won’t lose significant value

Types of credit

installment and revolving

Installment

a loan structure where you repay with fixed payments over a set term. (mortgages, car loans, student loans, personal loans, business loans

Revolving

in the form of a credit card where the consumer can use the money as they wish and pay it back to the bank later. Ex. credit cards personal lines of credit, home equity lines of credit, business lines of credit

Bankruptcy

a legal process when a person or business is unable to pay debts. stays on credit report from 7 to 10 years, and you could lose property/car