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BANKING AND MONEY

BANKING AND MONEY. ECONOMICS MADE EASY SIMULATION 模 拟 Mónǐ. INTRODUCTION. GOALS At the end of 3 cycles, you should be able to: 1. Understand the basics of the US money system 2. Be able to open an account and get a loan

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BANKING AND MONEY

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  1. BANKING AND MONEY ECONOMICS MADE EASY SIMULATION 模拟 Mónǐ

  2. INTRODUCTION • GOALS • At the end of 3 cycles, you should be able to: • 1. Understand the basics of the US money system • 2. Be able to open an account and get a loan • 3. Understand the need for the bank to maintain an interest rate spread that is positive • 4. Understand that some people or activities are more risky than others and thus will pay more to borrow money.

  3. INTRODUCTION (continued) • 5. Understand the workings of the Federal Reserve Board as it sets monetary policy • 6. Understand and realize that policy decisions made at the highest levels of the system affect decisions made at the bottom level of the system.

  4. BASIC TERMS • MONEY – What is it and how does it circulate (go through) the system? • CHECKS – How are they written? A 7 step process example

  5. WRITING A CHECK 1.Start by writing in the date and payee Start by writing in the date and payee. 1 of 7 PreviousNext

  6. WRITING A CHECK (cont) 2. Now, write the amount of your payment in numeric form. Start by writing in the date and payee. 1 of 7 PreviousNext

  7. WRITING A CHECK (cont) 3. Here’s what can happen if you’re not careful writing a check

  8. WRITING A CHECK (cont) 4. In this step, you write out the amount of your payment using words instead of numerals.

  9. WRITING A CHECK (cont) 5. At this point you sign your check, and you can write a memo if you like.

  10. WRITING A CHECK (cont) 6. To be extra careful, you can also draw a line through any excess space in the small box with your payment amount.

  11. WRITING A CHECK (cont) 7. Keep track of the checks you write (and your account balance) in your check register.

  12. BASIC TERMS (cont) • TIME DEPOSITS AND DEMAND DEPOSITS • FDIC • SAFE DEPOSIT BOX – where valuable items are secured in a bank • PRIME RATE – interest rate used by bank to lend to the best customers. SPREAD - The difference between the bid and the ask price of a security or asset. Between lender and borrower.

  13. BASIC TERMS (cont) • MULTIPLIER EFFECT - The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.

  14. BASIC TERMS (cont) • CLEARING A CHECK - Movement of a check from the bank in which it was deposited to the bank on which it was drawn, and the movement of its face amount in the opposite direction. • FED FUNCTION – The result of FED changes in the Reserve Requirement, discount rate and open market positions. • TIGHT AND EASY MONEY – Tight or easy money refers to how easy or difficult it easy for someone to get a loan. Factors such as a person’s credit whether it is good or bad, the type of interest rate (high or low), collateral (do they have a house or a car to use), etc.

  15. BASIC TERMS (cont) ANNUAL PERCENTAGE RATE (APR) - The term describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. For example, consider a $100 loan which must be repaid after one month, plus 5%. This loan has an effective APR of approximately 80% (1.0512 = 1.7959, which is approximately an 80% increase)

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