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

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Magic Trick

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  1. 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

  2. Basics of Banking

  3. 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

  4. Loans • Excess reserve money given to borrowers • Bank earns interest on loans to make a profit

  5. 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

  6. 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

  7. 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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