Word Problem Suppose Jack purchased 100 beans at the market. When he plants those beans at home, the resulting beanstalk produces five times as many beans.

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Presentation transcript:

Word Problem Suppose Jack purchased 100 beans at the market. When he plants those beans at home, the resulting beanstalk produces five times as many beans as he planted. How many beans grew on the beanstalk? Is there a way money can be created in the same way? Who creates money? We will explore how banks create money.

Money Supply = total amount of money available in the economy to purchase goods and services. The simplest measure includes coins/paper currency and all deposits in banks and savings institutions on which checks can be drawn. In this activity, the money supply will be total deposits at depository institutions plus all currency in circulation.

Money Creation – Step 1 Investor deposits $100,000 into Institution A.

Money Creation – Step 2 Institution A has required reserves of 20% - complete Activity 1 ledger for Institution A.

Money Creation – Step 2

Money Creation – Step 3 Institution A loans out $80,000 ($20,000 held in reserve) – now what is the size of the money supply? (total deposits + currency in circulation = 100, ,000 = $180,000); record $80,00 in round 1 expansion box on your activity sheet.

Money Creation – Step 4 Borrower takes out a loan for $80,000 and deposits it in Institution B. Complete the Institution B Ledger on Activity 1 worksheet.

Money Creation – Step 4 Borrower takes out a loan for $80,000 and deposits it in Institution B. Complete the Institution B Ledger on Activity 1 worksheet.

Money Creation – Step 4 Borrower takes out a loan for $80,000 and deposits it in Institution B. Complete the Institution B Ledger on Activity 1 worksheet.

Money Creation – Step 5 What will Institution B do with the $64,000? – loan it out. Now what is the size of the money supply (total deposits + currency in circulation = 100, , ,000 = $244,000); record $64,00 in round 2 expansion box on your activity sheet.

Money Creation – Step 6 Borrower takes out a loan for $64,000 and deposits it in Institution C. Complete the Institution C Ledger on Activity 1 worksheet.

Money Creation – Step 6 Borrower takes out a loan for $64,000 and deposits it in Institution C. Complete the Institution C Ledger on Activity 1 worksheet. Complete Institution C Ledger

Money Creation – Step 6 Borrower takes out a loan for $64,000 and deposits it in Institution C. Complete the Institution C Ledger on Activity 1 worksheet. Complete Institution C Ledger

Money Creation – Step 7 What will Institution C do with the $51,200? – loan it out. Now what is the size of the money supply (total deposits + currency in circulation = 100, , , ,200 = $295,200); record $51,200 in round 3 expansion box on your activity sheet.

Money Creation – Step 7 What will Institution C do with the $51,200? – loan it out. Now what is the size of the money supply (total deposits + currency in circulation = 100, , , ,200 = $295,200); record $51,200 in round 3 expansion box on your activity sheet.

Money Creation - Step 8-9 Continue and complete the last two ledgers (D and E) and The corresponding expansionary amounts.

Money Creation

What this all means: –US Mint prints $ and money is also created by loans and deposits. –The process of successive loans and deposits is called money creation. –Money multiplier = the amount that an initial $1 increase in excess of reserve will eventually add to the money supply –Money multiplier = 1 required reserve ratio –For our example 1/0.20 = 5 –Initial deposit of $100,000-$20,000(reserve) = $80,000 –What is the total amount the money supply could expand in our example? »($80,000 x 5.0 = $400,000) - enter $400,000 in the blank at the bottom of your worksheet.