- What role did you play in the scenario? What experiences/challenges did you have?
– In the first activity, I played a role of a banker and in the second one I played a role of a medium-risk borrower. As a banker, it was hard to have more people depositing in our bank. And as a medium-risk borrower, it was hard to get the money from the banks compared to low-risk borrowers. - In this activity the incentive for banks to make loans was candy/points. What incentives do banks have for making loans in the real world? What incentives do people have for keeping their money in the bank?
– In the real world, banks receive more interest rates from borrowers. And when people invest their money in the banks, they get more money in return and also their money is always safe except when bank has nothing left to give away. - We started with a money supply of only $40,000 and we finished with a whole lot more that than….where did the extra money come from?
– The new money came from people who were investing in different banks. Every time people took money from the banks and deposited in different banks which helped in increasing the total deposit at the end of each round. - What would the borrowers do with all the money they borrowed? Would their activity be helpful or harmful for an economy? How can you tell?
– Borrowers spend their money on different goods and services for eg: they buy cars. It can be both harmful and helpful because if borrowers are spending money and returning it on time to the bank then it’s helpful which contributes in country’s economic growth. If they are not returning the money, then banks will not be able to pay other people who invested in their banks. - In our simulation, all of the loans were “good” loans because all the borrowers paid them back. What would happen in an economy where people stopped paying back their loans? What would banks be forced to do?
– If people stopped paying back their loans then there will be an economic depression in the country. Bank will not get their money back from the borrowers and as a result bank will not be able to pay you back because the money you have in your bank account is a form of debt owed to you by the bank. - Banks held 20% of deposits on reserve in this simulation. What would happen to the simulation if it were changed to 30%? What if it were changed to only 10%?
– If it was changed to 30%, then the money that people have deposited in the banks could’ve been more secure because bank can not give that 30% of deposits on reserve to anyone. If any depositor needed money, there were more chances of getting most of their money from their bank accounts. If it was changed to 10%, there could’ve been less chances for the depositors to get their money back. - Most economic textbooks say that banks “create” money. After our simulation would you agree with this statement? Why or why not?
– I am somewhat agree with this statement because it’s the investors who create money for other people to buy. If people are not depositing their money into the banks, then banks will not be able to lend it to someone. For eg: when we were playing this activity, people were depositing into banks and then banks were lending their money to someone else.
Bank and Money Supply
Published
Economics 12 