Unit: Money, Banking and Monetary Policy

1. Unit: Money, Banking and Monetary Policy Topic: Banking

2. Learning Targets • The student will understand how the fractional reserve banking system creates money.

3. Banking • HIGH interest rates – more people will save money; fewer people will borrow money. • LOW interest rates – less people will save money; more people will borrow money

4. Banking • The U.S. banking system operates under a fractional reserve banking system. • When you put money in a bank, the bank only keeps part of it in the bank (required reserves – set by the Federal Reserve). • The bank can choose to hold extra money in reserves (excess reserves). • The rest of the money is used to make loans to other bank customers. • Money is created through this process.

5. Practice • The reserve requirement is 10%. Sophia deposits $100 in the bank. How much are required reserves? How much is loaned? • The reserve requirement is 25%. Josh deposits $1000 in the bank. How much are required reserves? How much is loaned?

6. Banking • Example: • Ava deposits $1000 into her bank. The Fed set the reserve requirement at 10%. • How much does the bank keep in reserves? • $100 • How much does the bank loan out? • $900 • What is the loaned money used for? • Spending on houses, investment, etc. • So…Ava’s $1000 is still available to her, and someone else has $900 to spend…the banking system created money!

7. Banking • Loans/borrowing occurs when someone needs money. • Businesses need money to INVEST (buy new resources, provide training for workers, build new facilities, etc.). • ↑ loans/borrowing (b/c of lower interest rates) => ↑ investment => ↑ resources => economic growth! • Remember – in order to make loans, a bank needs you to save!