 A FINANCIAL INTERMEDIARY—connects money from savers to people who need to borrow it.  Financial intermediaries include many types of institutions—some are banks, some are not  Ex., insurance companies, pension funds, money market funds, finance companies all collect money and then channel it into other investments  Banks are regulated by the Fed. Deposits insured up to $250,000

Serving Households Safe place for deposits (checking or savings) Can earn interest from bank on savings account Household can get car and home mortgage loans from bank Serving Businesses Business Deposits and Loans Payroll money, international transactions, dividend payments to stockholders, loans for capital equipment Other Activities Buying and selling securities Main source of our economy’s creation of new money

The Fed Changes in Reserve Requirements The Discount Rate Buying and Selling Securities

 Changes in Reserve Requirements— additional dollars entering the banking system or leaving it  Discount Rate—influences how much money the banks will make available to the public and at what price  Buying and Selling Securities—additional dollars entering banking system or leaving it

Annual percentage change in the monetary base—January 1, 1961 to April 1, 2009—Wall Street Journal, June 11, 2009

 Assets  Balance sheet “plusses.”  For a bank the loans it makes are assets.  Liabilities  Balance sheet “minuses,”  Deposits are liabilities  They really belong to the people who put them there.

 Required Reserves—dollars the Fed says a bank must HOLD aside for each deposit. They are assets  Excess—these additional dollars (above required reserves) can be used for loans or other profit- generating activities. They are also assets.  Demand Deposits—people’s savings and checking accounts. A bank must keep a certain portion on reserve. The remainder becomes excess reserves that can be used for profit generating activities such as loans. These are liabilities.

Balance Sheet An accounting tool that states the financial position of the business. One side shows assets and the other side shows liabilities.

Follow the original demand deposit until it dwindles down to nothing New checking accounts + New savings accounts + Other demand deposits Use the formula: 1÷reserve requirement x initial excess amount OR

Cannot force people or businesses to take out loans…OR… Someone may take out a loan and it may not get deposited in another bank. Because of Leakage the maximum amount of new money may not be created.