Banking Crisis – October 2008Name ______________________

Date _______________Period ___

Savings accts

Checking accts

Certificates of deposit

1% - 4% interest

Car Loans

Home Loans

Credit Cards

Corporate Loans

5% - 20% interestA. How Banks Work

1. Banks make a profit by charging a ____________ interest rate than they pay on deposits.

2. Banks may loan out 95% of the money they have deposited. If all of the people who deposited money in the bank went to collect it on the same day, the bank would ___________. We call this a “________ on the bank.”

B. Banks Rely on Each Other

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3. Banks typically make many overnight loans to each other ... money that is used to loan to ______________

4. “Commercial Paper” is a very ___________ term IOU from a corporation promising to repay a loan within 1 – 100 days; essentially it’s a corporate bond.

5. Money raised from commercial paper is used to buy capital, pay salaries, etc. List 3 capital items Southwest Airlines might buy: ___________________________________

6. A well-functioning financial system is considered _____________ to keeping an economy running.

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Patel Family – Nikil, Neha, Arvin & Leena

Mrs. Keith –

elementary teacherNeighbor Boy - Jake

High Schooler - Michelle

Lilia – Nail Tech

C. Circular Flow 6. What happens to visits to Peter Piper Pizza if Mr. Patel loses his job? __________________

7. What happens to Michelle?

____________________

8. How does Neha get her nails done?

____________________

9. So then does Lilia buy a ticket home for the holidays? _______

10. Which worker is probably the safest?

____________________

11. We call this the multiplier effect – when one person reduces her spending, she causes less income for the next person who must reduce his spending, causing less _____________ for the next person. In many ways, it’s advisable to keep _______________.

D. The US Government’s Bailout PlanUSA – our GDP (same as our annual income): $

13,807,000,000,000

our government’s 2007 receipts: 2,540,000,000,000

our government’s 2007 expenditures: 2,784,000,000,000

our government’s 2007 spending War in Iraq: 173,000,000,000

amount of proposed bailout of banks: 700,000,000,000http://www.bea.gov http://www.census.gov

Provisions of the Plan

(1) buy bad assets – mostly _______________ backed securities – from banks

(2) buy non-voting _____________ in banks.

Banking Crisis – October 2008Name ______________________

Date _______________Period ___

Savings accts

Checking accts

Certificates of deposit

1% - 4% interest

Car Loans

Home Loans

Credit Cards

Corporate Loans

5% - 20% interestA. How Banks Work

1. Banks make a profit by charging a __higher__ interest rate than they pay on deposits.

2. Banks may loan out 95% of the money they have deposited; if all of the people who deposited money in the bank went to collect it on the same day, the bank would _fail__. We call this a “_run_ on the bank.”

3. Banks typically make many overnight loans to each other ... money that is used to loan to _corporations__

4. Commercial Paper is a very _short_ term IOU from a corporation promising to repay a loan within 1 – 100 days; same thing as a bond - it’s a loan.

5. Money raised from commercial paper is used to buy capital, pay salaries, etc. List 3 capital items Southwest Airlines might buy: _new plane, new gate, luggage movers___

6. A well-functioning financial system is considered _essential_ to keeping an economy running.

B. Banks Rely on Each Other

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mer

cial

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per

Patel Family – Nikil, Neha, Arvin & Leena

Mrs. Keith –

elementary teacher

Neighbor Boy - Brandon

High Schooler - Michelle

Lilia – Nail Tech

C. Circular Flow 6. What happens to visits to Peter Piper Pizza if Mr. Patel loses his job? _many less__

7. What happens to Michelle? _she__

_loses her job__

8. How does Neha get her nails done?

_herself__

9. So then does Lilia buy a ticket home for the holidays? _no__

10. Which worker is probably the safest?

__the teacher!___11. We call this the multiplier effect – when one person reduces her spending, she causes less income for the next person

who must reduce his spending, causing less _income_ for the next person. In many ways, it’s advisable to keep

__spending!_.

D. The US Government’s Bailout PlanUSA – our GDP (same as our annual income): $

13,807,000,000,000

our government’s 2007 receipts: 2,540,000,000,000

our government’s 2007 expenditures: 2,784,000,000,000

our government’s 2007 spending War in Iraq: 173,000,000,000

amount of proposed bailout of banks: 700,000,000,000

http://www.bea.gov

http://www.census.gov

Provisions of the Plan

(1) buy bad assets – mostly _mortgage-__ backed securities – from banks

(2) buy non-voting _stakes_ in banks.

Patel Family – Nikil, Neha, Arvin & Leena

Mrs. Keith –

elementary teacherNeighbor Boy - Brandon

High Schooler - Michelle

Lilia – Nail Tech

$ $

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commercial paper – short term debt instrument – like a bond – issued by a corporation or a bank to finance short term needs

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per

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