1. List as many things that banks do as possible.

2. Banks . . .
Provide products like checking and accounts that help consumers manage money.

3. Banks . . .
Provide a safe place for individuals to hold money

4. Banks . . .
Pool the deposits of many individuals in order to make loans to borrowers.

5. Banks . . .
Banks create money by lending.

6. The Money Tree?

7. Reserve Requirement (rr)
Banks are required by law to keep some of the money in cash that customers deposit in the vault or in the Federal Reserve Bank.
$0 - $12.4m  0% rr
$12.4m – $79.5m  3% rr
$79.5m  10% rr

8. Welcome to a Smalltown
Bank

9. One Deposit in the Bank of Smalltown
$1,000

10. 10% goes in the vault (rr)
$1,000 $100

11. 90% is available to lend
$1,000 $100 $900

12. $1,000 $100 $900 $90

13. $1,000 $100 $900 $90 $810

14. $1,000 $100 $900 $90 $810 $81

15. $1,000 $100 $900 $90 $810 $81 $729

16. $1,000 $100 $900 $90 $810 $81 $729

17. $1,000 $100 $900 $90 $810 $81 $729 $271

18. $1,000 $100 $900 $90 $810 $81 $729 $271

19. $1,000 $100 $900 $90 $810 $81 $729 $271 $2,710

20. How much did the bank create through lending?
$2,710 -$1,000 $1,710

21. Follow Up Questions

22. What if the first depositor had kept the money at home?
No one else could have bought anything
The economy would have been smaller

23. $1,000 ?? ?? 200 800 Less money available to loan out
What would happen to the amount of money that banks could create if the reserve requirement was INCREASED to 20%?
$1,000 ?? ?? Less money available to loan out

24. $1,000 ?? ?? 10 990 More money available to loan out
What would happen to the amount of money that banks could create if the reserve requirement was DECREASED to 1%?
$1,000 ?? ?? More money available to loan out

25. Why would anyone ever want to decrease the amount of money in circulation?
If there is inflation, take away money to slow inflation

26. What is the effect on the economy when banks fail?
Economy is worse off!