 Answer on your warm up/exit ticket sheet:  What role do you think banks may play when a country transitions from a command economic system to market?  You have five minutes to quietly review for today’s quiz on LEQ 1 – Privatization.

Today’s LEQ: Why was /are there problems with the banking system in command economies?

 A commercial bank accepts savings, lends money to households and businesses, and offers other related services  Most importantly, it serves as a financial intermediary or “middleman” between households and businesses

 There are no commercial banks  Banks are more like an accounting agency  Only take in household deposits  Keeps track of financial transactions that corresponded to the central plan

 Privatization means firms must find ways to finance their investment in plants and equipment, and to cover other start-up costs  At the start of transition, commercial banks don’t exist or exist in the most basic form; they cannot effectively help the finance process  The path to develop these financial institutions is time consuming and challenging

 Roles: 3 entrepreneurs; the remainder are households (the lenders)  The goal is for three entrepreneurs to start businesses.  To do this, each entrepreneur needs to purchase workers, machines, and a factory (start-up costs)

 Start-up Prices:  A worker card cost $5  A machine card cost $10  A factory card cost $100  To start a business, an entrepreneur needs:  6 worker cards  3 machine cards  1 factory card  Entrepreneurs must buy the resources from the other students (households)… Let’s Review… WHY IS THIS?

 Entrepreneurs must borrow money to buy the required resource cards  They will have to pay interest in order to give savers (households) and incentive to lend their money  In order to borrow money, the entrepreneurs will have to sign promissory notes (loan agreement) with lenders. Lenders hold on to the promissory notes.

 Entrepreneurs: The first to collect all the resource cards and open the business  Households: Whoever receives the highest average interest rate  Add up the interest rates on your promissory notes and divide by the number of notes

 … and why?

 This time, savers (households) and entrepreneurs can utilize the fantastic financial services Wynn Bank…

 A modern economy is more efficient if search costs can be reduced.  How could they be reduced for businesses?  Financial institutions are middlemen, and in a market economy middlemen reduce search costs.

 Read Activity 7.3 and answer the questions at the end of the reading. Be ready to share your responses!!!

 Why would a lack of commercial banks in a transitioning economy get in the way of economic growth?