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April 26, 2018 

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INCREASING RETURNS TO SCALE: A given proportionate increase in all resources in the long run results in a proportionately greater increase in production. Increasing returns to scale exists if a firm increases ALL resources -- labor, capital, and other inputs -- by 10%, and output increases by more than 10%. You might want to compare decreasing returns to scale and constant returns to scale.

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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
    Banking

    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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    PRINCIPAL-AGENT PROBLEM

    A disconnection or conflict between the objectives and goals of the principal and those of the agent authorized to represent the principal. The principal-agent problem arises because an agent is given the responsibility and authority to take actions that affect both the principal, but can also affect the agent. This problem is common in corporate management, where the principal is shareholders and the agent is managers. It is also common in government, where the principal is the public and the agent is elected leaders.

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    BLUE PLACIDOLA
    [What's This?]

    Today, you are likely to spend a great deal of time touring the new suburban shopping complex hoping to buy either a lazy Susan for you dining room table or a set of serrated steak knives, with durable plastic handles. Be on the lookout for rusty deck screws.
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    This isn't me! What am I?

    In 1914, Ford paid workers who were age 22 or older $5 per day -- double the average wage offered by other car factories.
    "Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations. "

    -- Steve Jobs, Apple Computer founder

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