money and banks

MONEY & BANKS

You have one item card and one shopping list in front of you.

Barter to acquire the item you need.

BARTER GAME:

Why do you think we stopped bartering and started using money?

END OF BARTER:THE

Barter (the exchange of one good for another) fails in a modern economy

because it requirers a “double coincidence of wants.”

END OF BARTER:

Double coincidence of wants: a situation in which

two people each want some good or service that

the other can provide.

TRIVIA QUESTION:In the history of the world, what was used as money for the longest period of time, and over the largest

geographic area?

The Cowrie Shell

The Cowrie Shell

• Used in China as early as 700 BCE, spread to Southeast Asia, India, Africa, and Southern

Europe. Used until the 1800s CE. • Durable - they could last a century or more • Impossible to counterfeit • Collection was controlled by governments

Money makes complex economic activity possible

because it acts as a medium of exchange: something

that is widely accepted as a method of payment for

goods and services.

Money acts as a unit of account: a way that value is widely measured. Without a unit of account, you would

have to think of the opportunity costs of all

goods and services!

Finally, money acts as a store of value: something

that holds its value over time and can be spent in the

future. Money is a much more convenient store of

value than say, refrigerators.

BANKS

…are institutions that operate between a saver who deposits

money in the bank, and a borrower who receives a loan from the bank.

BANKS…

Loan: money individuals and businesses borrow

from the bank and promise to pay back over time.

1. Interest payments people make on their loans.

2. Other fees charged by the bank for various services.

3. Investing your money in the stock

market.

HOW BANKS MAKE A PROFIT:

The amount charged by a lender to a borrower for the use of assets (money).

INTEREST RATES:

BANKS INVEST MONEY:Some banks invest your money in low-risk stocks. This is an additional way that

banks generate a profit. Governments set regulations on the banks preventing them from making risky investments. Banks not regulated by the government (shadow

banks) are allowed to make riskier investments with the money they do not

keep in reserves.

1. Interest payments made to people who deposit money.

2. Loans that are not repaid. 3. Paying bank employees.

BANK EXPENSES:

BANKS…

You collect interest from the bank when you make a bank account!

The bank collects interest from you when you purchase a loan!

Banks typically keep 10% of the money people deposit within the banks themselves as reserves that can be instantly withdrawn. Each central bank sets a different reserve requirement.

RESERVE REQUIREMENT:

10%

90%

10% of depositors money remains in the bank

90% of depositors money becomes loans or investments

A well-run bank assumes that not all borrowers will repay their loans, and will budget accordingly. But, if banks loan out too much money, and then people try to withdraw their money that no longer exists, they can face bankruptcy.

HOW BANKS GO BANKRUPT:

BANK RUNS:(also called bank panics)

When people become concerned, for reasons legitimate or not, that the bank will

not have enough reserves for them to withdraw their money, they will quickly try to remove their money from the bank. If

too many people withdraw their money and the bank actually does run out of reserves,

the bank will go “bankrupt” (it will fail).

BANK RUNS:(also called bank panics)

BANKS CREATE MONEY:Imagine that a man deposits 10,000

USD in a bank.

The bank keeps $1,000 in reserves.

The bank loans the other $9,000 to a woman who wants to buy a car.

BANKS CREATE MONEY:Next, the woman spends the $9,000 she

borrowed on a car.The man who sold

the car deposits the $9,000 profit

into the bank.

Now, the bank has the original man’s deposit of $10,000 in the bank, and the second man’s

deposit of $9,000 in the bank.

BANKS CREATE MONEY:The bank, which started with $10,000 now has $19,000 because they made a loan, and the money eventually made it

back into the bank.