11/10/15 Topic: The Banking System EQ: How is money created through loans? Bellwork: Set up your Cornell notes, then answer the following question: What type of money do you have with you today?

The Banking System

The Money Supply The money supply is all money available in the United States M1 is money people can access easily and immediately Currency (paper money and coins) Checking account balances Traveler’s checks M2 is all assets in M1 plus money that cannot be used as cash directly Deposits in savings accounts Money market mutual funds

Functions of Banks Storing Money Saving Money Savings Accounts Checking Accounts Money Market Accounts Certificates of Deposit Loans Interest from loans are the largest source of income for banks

Loans Business loans help start and grow businesses Mortgages are loans to buy a house Credit Cards entitle their holders to buy goods and services based on their promise to pay at a later date All loans charge interest, the price paid for borrowing money, on the principal, the original amount borrowed Simple interest is paid only on principal Compound interest is paid both on principal and accumulated interest

Credit Cards and Debit Cards A credit card is basically a loan—a promise to repay at a later date A debit card is tied to your checking account When you use your debit card, it is like an electronic check If you charge more on your debit card than you have in your account, the bank will usually pay the difference, but will charge you a substantial fee for using the money (like interest for a short-term loan)

The Fractional Reserve System The Fed sets reserve requirements for banks; a minimum amount of money to keep on-hand A Fractional Reserve System is one in which a fraction of the total deposits are kept in the vault. The rest of the money can be loaned out. Reserves are usually in the form of cash stored in a vault, and are for withdrawals on accounts