Banking Crisis – October 2008

1. Banking Crisis – October 2008 Name ______________________ Date _______________Period ___ A. How Banks Work 5% - 20% interest Car Loans Home Loans Credit Cards Corporate Loans Savings accts Checking accts Certificates of deposit 1% - 4% interest 1. Banks make a profit by charging a ____________ interest rate than they pay on deposits. 2. Banks may loan out 95% of the money they have deposited. If all of the people who deposited money in the bank went to collect it on the same day, the bank would ___________. We call this a “________ on the bank.” B. Banks Rely on Each Other $ $ $ $ commercial paper • 3. Banks typically make many overnight loans to each other ... money that is used to loan to ______________ • “Commercial Paper” is a very ___________ term IOU from a corporation promising to repay a loan within 1 – 100 days; essentially it’s a corporate bond. • Money raised from commercial paper is used to buy capital, pay salaries, etc. List 3 capital items Southwest Airlines might buy: ___________________________________ • A well-functioning financial system is considered _____________ to keeping an economy running.

2. C. Circular Flow • 6. What happens to visits to Peter Piper Pizza if Mr. Patel loses his job? __________________ • What happens to Michelle? • ____________________ • How does Neha get her nails done? • ____________________ • So then does Lilia buy a ticket home for the holidays? _______ • Which worker is probably the safest? • ____________________ High Schooler - Michelle Patel Family – Nikil, Neha, Arvin & Leena Lilia – Nail Tech Mrs. Keith – elementary teacher Neighbor Boy - Jake 11. We call this the multiplier effect – when one person reduces her spending, she causes less income for the next person who must reduce his spending, causing less _____________ for the next person. In many ways, it’s advisable to keep _______________. USA – our GDP (same as our annual income): $ 13,807,000,000,000 our government’s 2007 receipts: 2,540,000,000,000 our government’s 2007 expenditures: 2,784,000,000,000 our government’s 2007 spending War in Iraq: 173,000,000,000 amount of proposed bailout of banks: 700,000,000,000 D. The US Government’s Bailout Plan • Provisions of the Plan • buy bad assets – mostly _______________ backed securities – from banks • buy non-voting _____________ in banks. http://www.bea.govhttp://www.census.gov

3. Banking Crisis – October 2008 Name ______________________ Date _______________Period ___ A. How Banks Work 5% - 20% interest Car Loans Home Loans Credit Cards Corporate Loans Savings accts Checking accts Certificates of deposit 1% - 4% interest 1. Banks make a profit by charging a __higher__ interest rate than they pay on deposits. 2. Banks may loan out 95% of the money they have deposited; if all of the people who deposited money in the bank went to collect it on the same day, the bank would _fail__. We call this a “_run_ on the bank.” B. Banks Rely on Each Other $ $ $ $ commercial paper • 3. Banks typically make many overnight loans to each other ... money that is used to loan to _corporations__ • Commercial Paper is a very _short_ term IOU from a corporation promising to repay a loan within 1 – 100 days; same thing as a bond - it’s a loan. • Money raised from commercial paper is used to buy capital, pay salaries, etc. List 3 capital items Southwest Airlines might buy: _new plane, new gate, luggage movers___ • A well-functioning financial system is considered _essential_ to keeping an economy running.

4. C. Circular Flow • 6. What happens to visits to Peter Piper Pizza if Mr. Patel loses his job? _many less__ • What happens to Michelle? _she__ • _loses her job__ • How does Neha get her nails done? • _herself__ • So then does Lilia buy a ticket home for the holidays? _no__ • Which worker is probably the safest? • __the teacher!___ High Schooler - Michelle Patel Family – Nikil, Neha, Arvin & Leena Lilia – Nail Tech Mrs. Keith – elementary teacher Neighbor Boy - Brandon 11. We call this the multiplier effect – when one person reduces her spending, she causes less income for the next person who must reduce his spending, causing less _income_ for the next person. In many ways, it’s advisable to keep __spending!_. USA – our GDP (same as our annual income): $ 13,807,000,000,000 our government’s 2007 receipts: 2,540,000,000,000 our government’s 2007 expenditures: 2,784,000,000,000 our government’s 2007 spending War in Iraq: 173,000,000,000 amount of proposed bailout of banks: 700,000,000,000 D. The US Government’s Bailout Plan • Provisions of the Plan • buy bad assets – mostly _mortgage-__ backed securities – from banks • buy non-voting _stakes_ in banks. http://www.bea.gov http://www.census.gov

5. High Schooler - Michelle Patel Family – Nikil, Neha, Arvin & Leena Lilia – Nail Tech Mrs. Keith – elementary teacher Neighbor Boy - Brandon

6. $ $ $ $ $ $ commercial paper $ $ $ $ commercial paper – short term debt instrument – like a bond – issued by a corporation or a bank to finance short term needs