March 17, 2018 

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TIGHT MONEY: A term used when the Federal Reserve System pursues contractionary monetary policy. In other words, to contract our economy out of an inflationary expansion, the Fed decreases the amount of money in the economy or makes it "tighter" for people to get money (usually through bank loans).

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Lesson Contents
Unit 1: What It Is
  • Banking
  • Intermediary
  • Unit 1 Summary
  • Unit 2: Banking Details
  • Types
  • Commercial Banks
  • S&Ls
  • Credit Unions
  • Savings Banks
  • Balance Sheet
  • Unit 2 Summary
  • Unit 3: Reserve Banking
  • Reserves
  • Legal, Required, and Excess Reserves
  • Goldsmith
  • Goldsmith Deposits
  • Goldsmith Loans
  • Goldsmith Reserves
  • Unit 3 Summary
  • Unit 4: Regulating Banks
  • Why?
  • Who?
  • How?
  • Unit 4 Summary
  • Unit 5: The Economy
  • Benefits
  • Problems
  • Unit 5 Summary
  • Course Home

    In this lesson, we take a look at the role banking plays in the macroeconomy. Banking is most important to the study of macroeconomics because a substantial fraction of the economy's money supply is under the direct control of commercial banks (as opposed to government). Because government needs to control the money supply to promote business-cycle stability, they need to control banks control of the money supply. As such, we need to take a look at how banks operate, including how they issue the deposits that make up the money supply.

    • The first unit opens this lesson with an overview of banks and the banking system, including their role as financial intermediaries.
    • Moving into the second unit, we take a closer look at the banking system, especially the four basic types of banks (banks, savings and loans, credit unions, and mutual savings banks) and the assorted assets and liabilities of a typical bank.
    • The key banking principle -- fractional-reserve banking -- is then discussed in the third unit with a little story about Fred the Goldsmith.
    • The fourth unit of this lesson discusses the why, how, and who of bank regulation.
    • The fifth and final unit then examines the benefits and problems of fractional-reserve banking for the macroeconomy.

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