Presentation on theme: "Mr. Bernstein Module 25: Banking and Money Creation February 26, 2015"— Presentation transcript:
1 Mr. Bernstein Module 25: Banking and Money Creation February 26, 2015 AP EconomicsMr. BernsteinModule 25:Banking and Money CreationFebruary 26, 2015
2 AP 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
3 AP 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
4 AP Economics Mr. Bernstein How Banks Create Money: An ExampleSimilar to the Spending Multiplier
5 AP 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
6 AP 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
7 AP 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?