Mac Test 3

No bank ever has enough ready cash to simultaneous close all checking accounts

• FDIC-federal deposit insurance corporation
• Insures money in your account up to 250,000.
• Bank pays insurance premium.
• Tax payers pay if insurance doesn't have money to pay

• Liabilities are more than assets.
• Example alot of bad loans

The owners equity goes to zero (broke)

• A. Government buys the bad loans from the banks
• B. Inject owner's equity into the banks (gov becomes co-owner)

If large banks fail it would be too disruptive to the overall economy. (Job loss, business failure)

• Banks loan money to homebuyers, and banks hold the loans.
• Bank profits-depends on borrower to repay loans & bank earns interest

• Banks loan money to home buyers and sell loan to other investers
• Bank profits- fees

• A. Past Incentives- make careful loans (good loans). Ability to pay loans bases on Income and job
• B. Current Incentives- make lots of loans, maximize fees and income. Ability to pay based on expected future increase in price of house.

• They buy mortgages from banks and hold them.
• Resells them to other investers.
• Insures mortgages, earns a fee

Draw graph. Demand for houses kept increasing supply stayes the same

• Indepentant Agency Part of the US government
• Created by Act of Congress-1914 Federal Reserve Act
• Ron Paul-wants to abolish Federal Reserves
• Congress divided US in 12 Geographic Regions creating 12 Regional Federal Reserve Banks, each headed by a regional federal bank president

Tim Geithner

Appointed by President of the US, Confirmed by US Senate, to a 14 year term, non-renewable

• Ben Bernanke
• 1st appointed in 2006 by bush, and in 2010 by obama
• Term ends in 2014
• The president appoints fed chairman to a renewable 4 year term

• Alan Greenspan 1987-2006
• Paul Volcker 1979-1987

• 12 members include 7 members of the Federal Board of governers and 5 of the Presidents of Regional Federal Banks
• they meet every 6 weeks

• Fed regulates banks (set reserve ratio)
• Fed acts as a banker for banks (lend money to banks)
• Fed acts as banker for US Government{treasury} (lend mony to government)
• FED issues paper Currency(printed at Bureaua of printing and engraving new currency 120 billion)
• FED controls the size of money supply (M1)

A deliberate change in the size of nation's money supply done by the FEDs in order to influence the overall economy. change-increase(expansionary) or decrease (contractionary) M1

• Reserve ratio
• Discount rate
• Open market operations

• Decrease required reserves
• Increase excess reserves
• Banks can make more loans
• Increase the money supply

• Increase required reserves
• Decrease excess reserves
• Banks make fewer loans
• Decrease money supply

Interest rate charged by the Fed when the Fed lends dollar reserves to a bank. Fed set discount rate 3/4 %

Interest rate on a loan from bank to customer. (higher than discount rate for profit)

• Bank is charges lower interest rate by Fed
• Banks can charge a lower interest rate to customer
• More loans
• Increase money supply

• Bank is charges higher interest rate by Fed
• Banks will charge a higher interest rate to customer
• Fewer loans
• Decrease money supply

• Loans to the US government at some specified interest rate and for some time perieod
• Are issued by the US Treasury when the government borrows money
• Why? Budget deficeit government spends more than they collect in taxes
• Most can be resold to other investors

• Fed pays bank in reserves
• bank have more excess reserves
• bank make more loans
• M1 up

• Bank pays fed in reserves
• bank have less excess reserves
• bank make fewer loans
• M1 down

• US treasury spends newly created money (by Fed) into economy
• Increase money supply

• increase supply of loan
• decrease interest rate
• more loans
• increae spending
• increase GDP

• pros:
• increase spending, increase production, increase jobs, lower interest rates(borrowers)

• cons:
• Banks don't lend to business & consumers,can cause inflation,can cause bad loans, can increase level of consumer debt, can cause trade deficit, lower interest rates (savers)

• decrease supply of loan
• increase interest rate
• Excess reserves down
• fewer loans
• decrease spending
• lowers GDP

• Pros:
• decrease spending, can prevent inflation, high interest rates(savers), encourage savings

• Cons:
• high interest rate (borrowers), can cause recession, high unemployment

• Increase in demand for loans interest rate up
• Decreae in demand for loans interest rate down

Increase in nation's capacity to produce products

• percentage increase in our nation's capacity to produce products
• 3-4 % good, 1-2% average

Number of products produced per worker per hour

• better technology
• Better labor-education, training, skills
• Better management
• More investment goods-computers, tools, equipment

More investment spending leads to faster economic groth

• 50-75 productivity growth averaged +3% per year (economy grows 3% each year) fast
• 75-2010 productivity growth averaged 1 1/2 % per year (economy grows 1 1/2% per year) slow
• Trend- slowed down from 75 until today

• Transition to information based economy
• Outsourcing
• Financial deregulation

Productivity growth dictates(equals) average real income