Presentation on theme: "Mr. Bernstein Module 25: Banking and Money Creation February 26, 2015"— Presentation transcript:
1Mr. Bernstein Module 25: Banking and Money Creation February 26, 2015 AP EconomicsMr. BernsteinModule 25:Banking and Money CreationFebruary 26, 2015
2AP Economics Mr. Bernstein Banking and Money CreationObjectives - Understand each of the following:The role of banks in the economyThe reasons for and types of banking regulationHow banks create money
3AP Economics Mr. Bernstein How Banks Create MoneyBanks receive depositsBanks make loansBanks hold reserves against those loansIf reserves are 10%, loans can be 10x depositsThis effectively creates moneyDemonstrated by T-Account:Fed sets reserve requirements
4AP Economics Mr. Bernstein How Banks Create Money: An ExampleSimilar to the Spending Multiplier
5AP Economics Mr. Bernstein Problem of Bank RunsIf public fears a bank may fold and be unable to pay back depositors, they rush to the bank to make withdrawals before others canSince deposits are several times reserves, a bank with solid loans but the subject of rumours may be unable to meet demand for withdrawalsCan become a self-fulfilling prophecyPreventing bank runs is a primary reason for bank regulation
6AP Economics Mr. Bernstein Bank RegulationDeposit InsuranceCurrent FDIC insurance is $250,000 per accountCapital Requirements (= Assets – Liabilities)Capital Requirements have been rising since 2008 crisisReserve RequirementsCurrently 10% in the USADiscount WindowFed stands as short-term lender to banks in need of capital
7AP Economics Mr. Bernstein Reserves, Bank Deposits and the Money MultiplierMoney Multiplier = 1 / reserve ratio…MM = 1/rrExcess Reserves = Total Reserves - rrMM tells us howmuch money can becreated from each $of Excess ReservesIn reality, MM is not10 – its now < 1.Why?