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Magic Trick. Would you believe me if I told you I can take these $10 and turn them into over $34 without: Printing any new money Receiving any new money. Basics of Banking. Deposits. Ex: Check/savings deposit, Certificate of Deposit (CD), etc

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Magic Trick

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Magic trick

Magic Trick

  • Would you believe me if I told you I can take these $10 and turn them into over $34 without:

    • Printing any new money

    • Receiving any new money


Basics of banking

Basics of Banking


Deposits

Deposits

  • Ex: Check/savings deposit, Certificate of Deposit (CD), etc

  • When a deposit is made into a bank, the bank is required to keep a % of the deposit in reserve

    • What are reserves?

  • Known as the reserve requirement (%)

  • The remaining amount, excess reserves, is free for the bank to use as it pleases

    • Give it out as a loan

    • Buy government bonds

    • Pay expenses


  • Loans

    Loans

    • Excess reserve money given to borrowers

      • Bank earns interest on loans to make a profit


    Monetary growth

    Monetary Growth

    • Banking (loans & deposits) can cause the supply of money to increase

      • “Creates” more money for people to use

      • How?

        • Simulation – 2 volunteers

          • Banker

          • Bank customer


    Results of monetary growth

    Results of Monetary Growth

    • How do banks benefit from monetary growth?

      • More money = more loans = more interest = more profit

    • How do people benefit from monetary growth?

      • More money available to buy houses, cars, boats, computers, etc.

    • Amount of monetary growth depends on the reserve requirement percentage

      • Lower percentage = more money creation


    Quick review

    Quick Review

    • What do we call the amount of a deposit that is required to go into reserves?

    • What do we call the leftover amount that is not put into reserve?

    • How do banks use excess reserves to make a profit?

    • How does banking (loans & deposits) impact the supply of money?

    • How does the reserve requirement impact monetary growth?

    Reserve requirement

    Excess reserves

    Offer loans which earn interest

    Makes it grow

    Higher requirement = small growth

    Low requirement = large growth


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