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For more information, please see full course syllabus of AP Macroeconomics
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Banking & Money Creation

  • Banks are financial intermediaries that use liquid assets to finance illiquid investments of borrowers
  • The Federal Reserve imposes restrictions on the amount of money banks can lend out through the Required Reserve Ratio, currently at 10%
  • The Federal Deposit Insurance Corporation (FDIC) insures deposits of up to $250,000 for customers
  • Banks “create” money by lending out money from its “reserves.”
  • The money multiplier formula is the Initial deposit X (1/RRR)
  • The Monetary Base = Currency in Circulation + Bank Reserves
  • The Money Supply = Currency in Circulation + Checkable Bank Deposits

Banking & Money Creation

Lecture Slides are screen-captured images of important points in the lecture. Students can download and print out these lecture slide images to do practice problems as well as take notes while watching the lecture.

  • Intro 0:00
  • Lesson Overview 0:12
  • What Do Banks Do? 1:09
    • What Are Banks
    • Restrictions
    • Federal Reserve
  • Assets and Liabilities of Park's Place Bank 2:39
  • The Problem of Bank Runs 6:36
    • Financial Trouble Rumors Lead to Depositors Withdrawing Funds
    • Panic
    • Self-Fulfilling Prophecy
  • Bank Regulation 8:37
    • Deposit Insurance
    • Capital Requirement
    • Reserve Requirements
    • Discount Window
  • Money Creation Process 12:24
  • Money Multiplier Formula 15:20
    • Required Reserve Ratio
    • Example
  • Real World Money Multiplier 17:11
    • Some People Hold Onto Cash
    • Monetary Base
    • Money Supply
    • Money Multiplier
    • Normally It Is About 1.9
    • 2008: It Was About 0.8
    • Venn Diagram
  • Example 1 22:28
  • Example 2 23:57
  • Example 3 26:30
  • Example 4 29:05