1. KRUGMAN'S MACROECONOMICS for AP* 25 Margaret Ray and David Anderson Module Banking and Money Creation

2. What you will learn in this Module : The role of banks in the economy The reasons for and types of banking regulation How banks create money Ben Bernanke: I don't really understand why there needs to be so much tension about this. The country is facing the worst economy since the Great Depression. If the financial system collapses, it will take every one of you down. (Fall 2008) From: “Too Big To Fail” – Andrew Ross Sorkin

3. More than half of the M1 is currency The rest is demand deposits The Monetary Role of Banks

4. What Banks Do What Banks Do Financial Intermediary Bank Reserves T - Account Assets & Liabilities Reserve Ratio Required Reserve Ratio

5. The Problem of Bank Runs The Problem of Bank Runs Customer Deposits > Bank Reserves Why does this usually work? Bank Run Why? Bank Failure

6. Bank Regulation Bank Regulation Deposit Insurance FDIC Capital Requirements Reserve Requirements The Discount Window

7. Determining the Money Supply

8. How Banks Create Money How Banks Create Money

9. Reserves, Bank Deposits, and the Money Multiplier Reserves, Bank Deposits, and the Money Multiplier Ben Bernanke: I spent my entire academic career studying the Great Depression. The depression may have started because of a stock market crash, but what hit the general economy was a disruption of credit. Average citizens unable to borrow money, to do anything. To buy a home, start a business, stock their shelves. Credit has the ability to build a modern economy, but lack of credit has the ability to destroy it, swiftly and absolutely. If we do not act, boldly and immediately, we will replay the depression of the 1930s, only this time it will be far, far worse. We don't do this now, we won't have an economy on Monday. (Fall – 2008) From: “Too Big To Fail” – Andrew Ross Sorkin

10. Reserves, Bank Deposits, and the Money Multiplier Reserves, Bank Deposits, and the Money Multiplier “Leaks” Excess Reserves rr = reserve ratio Loan Expansion = Excess Reserves / rr MM = 1/rr

11. The Money Multiplier in Reality The Money Multiplier in Reality Monetary Base Money Multiplier Each dollar of bank reserves backs several dollars of bank deposits, making the money supply larger than the monetary base.

12. Table 25.1 How Banks Create Money Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers Assumes a reserve ration of 10%

13. Figure 25.1 A T-Account for Samantha’s Smoothies Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

14. Figure 25.3 Effect on the Money Supply of Turning Cash into a Checkable Deposit at First Street Bank Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers