Policy #13: Banking1. Taxing, spending,

and borrowing is monetary policy.

2. Trading a Coke for a Sprite is also called bartering.

3. Cutting taxes on the wealthy & businesses is also called the snow theory.

Why do we have banks?

• You need a safe place to keep your money – deposit in bank– Who protects your

deposits today?

• You need $ - banks will loan it to you w/interest

Balance Sheet: financial accounts

• Assets: anything owned (+)• Liability: anything owed (-)•Net worth: assets – liability

Is a car an asset or a liability?

Balance Sheet • Determine which is an asset and

which is a liability:– Credit card balance of $5,000– House that is worth $300,000– Mortgage of $275,000– Savings account with $2,000

• What is your net worth?

Regulating BanksThe Federal Reserve Board

(The Fed)

• This is the bank for banks (the national bank)

• Board of Governors – appointed by Pres and confirmed by S

Functions of the Fed1. Regulates money supply

• Amount in circulation• M1: currency & checking accts held

by public• M2: M1 + savings & money markets• Helps control inflation

2. Reserves: each bank must keep a certain amount of cash on hand or at the Fed

3. Determines interest rates: Fed loans $ to banks called discount rate: lower rate given to banks

• Banks loan out money to best customers at prime rate• Today’s prime rate = 3.25%• In 2006 = 8.00% prime rate • Today’s discount rate = 0.75% • In 2006 – 6% discount rate

• Why the change?

PP# 14: Balancing a Checkbook

• Check writing