UGBA 10 Lecture Notes - Lecture 6: Full-Reserve Banking, Fractional-Reserve Banking, Deposit Insurance
23 May 2018
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Money and Banking Intro February 3
I. Money
• Money: object that is portable, divisible, durable, and stable.
o Functions of money: medium of exchange, store of value, and measure of worth.
• Barter is an alternative to money. Although it is not a good store of value or divisibility
(ie: cow will eventually die).
• Need to ath oey supply to preet losig oey if there is a iflatio.
o Demand for money also affects the supply
• M1 supply can have an immediate effect if it is lent out again.
II. The labor market
• Low labor force participation is bad because that means that there are less people
working.
III. The role of banking
• Participants in the banking industry
o Commercial bank
• Nondeposit institutions
o Pension fund
o Insurance company
• The prime rate: interest rate aailale to a ak’s ost reditorthy ustoers;
indicative of consumers not the government (borrows more money).
• Financial services provided by banks: checking accounts, deposit accounts, certificates of
deposit, credit cards (unsecured loans), loans, mortgages (secured), and IRA.
o IRA: tax-deferred pension fun that wage earners set up to supplement
retirement funds.
IV. Fractional reserve banking
• Potential problem with full reserve banking: not so many loans given out and
encouragement for doing business.
o The only time you could loan would be from equity investors, which would be
expensive because they require returns.
• Bank run: when depositors lose faith i a ak or a fiaial istitutio’s aility to repay
their money.
o No problem of bank run if it is full reserve banking
V. Deposit insurance
• FDIC: government preserves confidence by supervising banks and insuring deposits in
banks and thrift institutions.
o Commercial banks pay membership fees to the FDIC
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UGBA 10 Full Course Notes
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