Text: Better Business

Video Title: BancFirst – Economics and Banking Length: 6:48

Classroom Application: Instructors will find this video useful in discussing concepts related to economics and banking, including money-based economics, banks, interest, supply and demand, the normal business cycle, GDP, consumer price index, and unemployment rate.

Synopsis This video gives an overview of the world of banking and economics. Using BancFirst and its lending to homeowners as an example, the video addresses key terms and issues such as money-based economics, banks, interest, supply and demand, the normal business cycle, GDP, consumer price index, and unemployment rate.

Discussion Questions 1. How is economics defined and what is its relationship to banks?

Economics is the study of how individuals and businesses make decisions to best satisfy wants, needs and desires with limited resources. The center of money-based economics is the bank. When you deposit money, banks pay you interest, then lend the money at a higher rate to individuals and businesses. Without banks to provide capital (or liquidity), most people would never be able to own homes or start businesses.

2. Explain what is meant by supply and demand and how it is related to the housing market.

In the context of home ownership, homes are products that are subject to the law of supply and demand. Most of the time, prices are set at the equilibrium price, which is based on supply and demand (how many homes are for sale and how much interest there is in buying them). If you look at a graph of home prices and number of homes for sale, the equilibrium price would be the point at which the two curves intersect.

A few years ago, banks and mortgage lenders made it easier for people to buy homes by relaxing certain rules. More people were in the market for homes, so the demand for homes to buy increased. In response to the increase in demand, home prices went up. Builders started building more homes, so then the supply went up. All of these massive shifts in supply and demand caused the housing bubble to burst.

Homeowners who took out large loans for which they were not qualified starting having trouble making payments. With more houses on the market, prices started to come down. Banks then tightened credit standards, which caused the demand to lessen (because fewer people where qualified to buy homes).

3. How does the normal business cycle relate to the economy?

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall The economy peaked when people had jobs and were spending money freely. When people lost their jobs and their incomes, they were no longer able to spend money and make investments. Many people were unable to pay their mortgages. In addition, millions of people stopped buying new cars, televisions or even basic necessities. With unemployment on the rise and banks cracking down on easy credit, most Americans used their available cash to pay off their debts. This caused a recession that nearly became a depression.

4. Define GDP and consumer price index.

Gross Domestic Product (GDP) is how much the country is producing in goods and services in a given period. High GDP is healthy, low is not.

Consumer price indexes measure the stability of prices. Higher prices signal inflation (too much money chasing too few goods and services), whereas low prices are a sign of deflation (not enough money in the system).

Quiz

1. Which of the following statements about banks is FALSE? a. They are the center of money-based economics. b. When you deposit money, banks pay you interest. c. Banks rarely make interest off of the money they loan. d. Without banks, few people would be able to own homes. Answer: c Explanation: The center of money-based economics is the bank. When you deposit money, banks pay you interest, then lend the money at a higher rate to individuals and businesses. Without banks to provide capital (or liquidity), most people would never be able to own homes or start businesses. 2. Which of the following statements regarding equilibrium price is true? a. It is based on supply and demand. b. It is based on credit card interest rates. c. It is based on the average price of homes in the neighborhood. d. It is based on the last price the home sold for. Answer: a Explanation: In the context of home ownership, homes are products that are subject to the law of supply and demand. Most of the time, prices are set at the equilibrium price, which is based on supply and demand (how many homes are for sale and how much interest there is in buying them). If you look at a graph of home prices and number of homes for sale, the equilibrium price would be the point at which the two curves intersect.

3. All of the following are factors that caused the housing bubble to burst EXCEPT ______. a. banks tightened their lending requirements b. banks made it easier for people to buy homes c. in response to an increase in demand, home prices went up

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall d. builders increased the supply buy constructing more homes Answer: a Explanation: A few years ago, banks and mortgage lenders made it easier for people to buy homes by relaxing certain rules. More people were in the market for homes, so the demand for homes to buy increased. In response to the increase in demand, home prices went up. Builders started building more homes, so then the supply went up. All of these massive shifts in supply and demand caused the housing bubble to burst.

4. Which of the following contributed to the recession of 2008? a. Wealthy people refused to lend money to banks. b. The frequency of fraudulent credit card use increased. c. Americans stopped spending money on new things. d. Unemployment caused housing prices to increase. Answer: c Explanation: When people lost their jobs and their incomes, they were no longer able to spend money and make investments. Many people were unable to pay their mortgages. In addition, millions of people stopped buying new cars, televisions or even basic necessities. With unemployment on the rise and banks cracking down on easy credit, most Americans used their available cash to pay off their debts. 5. What would be the MOST probable goal of a government changing the tax rate? a. to increase banks’ interest rates b. to decrease the amount of mortgages c. to discourage consumer spending d. to avoid a recession Answer: d Explanation: Changing the tax rate is one of several economic tools a government has at its disposal to help avoid an economic recession. Other tools include increased government spending, increasing or decreasing the money supply, selling treasury securities, changing interest rates or altering amount of money they require banks to reserve for emergencies.