Summary of Learning Outcomes

1. What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply?

Money is anything accepted as payment for goods and services. For money to be a suitable means of exchange, it should be scarce, durable, portable, and divisible. Money functions as a medium of exchange, a standard of value, and a store of value. The U.S. money supply consists of currency (coins and paper money), demand deposits (checking accounts), and time deposits (interest-bearing deposits that cannot be withdrawn on demand).

2. How does the Federal Reserve manage the money supply?

The Federal Reserve System (the Fed) is an independent government agency that performs four main functions: carrying out monetary policy, setting rules on credit, and managing the money supply. The three tools it uses in managing the money supply are open market operations, reserve requirements, and the discount rate. The Fed played a major role in keeping the U.S. financial system solvent during the Great Recession and during the COVID-19 pandemic. Through loans, bailouts, legislation, and interest rate adjustments, the Federal Reserve works to bring stability to the economy through the financial system.

3. What are the key financial institutions, and what role do they play in the process of financial intermediation?

Financial institutions can be divided into two main groups: depository institutions and nondepository institutions. Depository institutions include commercial banks, thrift institutions, and credit unions. Nondepository institutions include insurance companies, pension funds, brokerage firms, and finance companies. Financial institutions ease the transfer of funds between suppliers and demanders of funds.

4. How does the Federal Deposit Insurance Corporation (FDIC) protect depositors’ funds?

The Federal Deposit Insurance Corporation insures deposits in commercial banks through the Bank Insurance Fund and deposits in thrift institutions through the Savings Association Insurance Fund. Deposits in credit unions are insured by the National Credit Union Share Insurance Fund, which is administered by the National Credit Union Administration. The FDIC sets banking policies and practices and reviews banks annually to ensure that they operate fairly and profitably.

5. What role do U.S. banks play in the international marketplace?

U.S. banks provide loans and trade-related services to foreign governments and businesses. They also offer specialized services such as cash management and foreign-currency exchange.

6. What trends are reshaping financial institutions?

There will be a continued focus on regulatory and compliance issues, especially as technology plays a larger role in the industry and cybersecurity concerns come to the forefront. Banks will continue to tackle customer engagement and technology initiatives, as consumers will demand more accessibility and convenience with their relationships with banks and other financial institutions. Fintech services and their continued innovation streamline banking operations. Mobile apps are evolving to give a more personalized experience and enable firms to collect and utilize customer data to enhance their services to customers. Finally, online payment platforms continue to grow and are an integral player in the banking and financial sector, as consumers' expectations drive innovation in the industry.