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.

BEGIN Lesson =>