12th grade What money is, and how banks create money by lending worksheet

What money is, and how banks create money by lending

Grade 12 Social Studies Worksheet

Circle the best answer.

1. Read this first

   Use this

   Cards A to D on reserves and the money supply (card A is a model in our words; card B is exact; card C is real data; card D is made up). Card A, "The classroom money multiplier". Who made it: written for this sheet. Summary in our words, not a quotation: In the model a bank keeps 10 percent of each deposit as reserves and lends the rest. Each loan is spent and deposited at a bank again. A first deposit of $1,000 can grow total deposits to at most $1,000 ÷ 0.10 = $10,000. Card B, "Reserve requirements". Who made it: the Federal Reserve Board (federalreserve.gov), read November 14, 2026. Excerpt: "As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020." Card C, "M2 and reserve balances". Who made it: FRED, the Federal Reserve Bank of St. Louis. Table, columns When | M2 (billions of dollars, February) | Reserve balances ($ trillions, week ending): early 2020 | 15,492.8 | 1.70 (March 4, 2020); early 2021 | 19,641.4 | 3.88 (March 31, 2021); early 2022 | 21,706.0 | 3.83 (March 30, 2022); early 2024 | 20,896.0 | 3.50 (March 27, 2024). Note: M2 counts cash, checking and savings deposits and similar balances; reserve balances are what banks hold at the Federal Reserve. Card D, "A student's claim (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: Banks can lend only what they hold in reserves, so reserves limit how much money exists.

2. 1.

   Jun applies card A to a first deposit of $1,000. Which statement about the model is right?

   • At most $10,000 is new money, since the multiplier is 1 ÷ 0.10 = 10 times the deposit
   • At most $900 more is created, since the bank lends 90 percent of the first deposit
   • At most $9,000 of the $10,000 in deposits is new, since $1,000 was already deposited
   • At most $11,000 results, which is the $10,000 plus the first $1,000 deposit
3. 2.

   Pia compares cards A and B. What does card B do to card A's 10 percent rule?

   • It changes nothing, since banks still keep 10 percent of each deposit as reserves
   • It means banks hold no reserves, so card C's reserve figures must be wrong
   • It makes the multiplier endless, so banks can create deposits with no limit
   • It ends the legal 10 percent rule, so card A is a teaching model, not a limit on banks
4. 3.

   Bo divides each M2 figure in card C by the reserve balances. A student says the money multiplier of 10 from the model held in 2020. Which reading fits?

   • The ratio rose over the years, from about 5 to 9, so banks lent more each year
   • The ratio near 9 in 2020 shows the model fit, and the later drops are data errors
   • The ratio stayed between 5 and 6 in the later rows, so the model works with a smaller ratio
   • The ratio fell from about 9.1 to 5.1 in a year, so it is not a fixed multiplier

5. Use this

   Cards A to C on what a loan does to a bank (card A is in our words; cards B and C are made up). Card A, "T-account rules". Who made it: written for this sheet. Summary in our words, not a quotation: A bank lists assets (reserves and loans) on the left and liabilities (deposits) on the right. When a bank makes a loan by crediting the borrower's account, loans and deposits both rise by the loan. When the borrower pays someone at another bank, deposits and reserves both fall by that payment. Card B, "Northfield Bank before any loan (made up)". Who made it: written for this sheet. Table, columns Item | Amount: reserves | $320; loans | $680; deposits | $900; equity | $100. Card C, "Two events (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: Event 1: Northfield lends $200 to a builder by crediting the builder's account. Event 2: the builder pays $200 to a supplier whose account is at another bank.

6. 4.

   Esme follows Event 1 on card C. After it, what does Northfield's balance sheet show?

   • Loans of $880, deposits of $1,100 and equity of $300, since the new loan is Northfield's own asset
   • Reserves of $120 and deposits of $900, since Northfield pays the $200 loan out of reserves
   • Loans of $880 and deposits of $900, since the $200 loan is paid from depositors' money
   • Loans of $880 and deposits of $1,100: both rise $200, and equity stays at $100
7. 5.

   Ari follows Events 1 and 2 on card C. After both, what does Northfield's balance sheet show?

   • Reserves of $320, loans of $880 and deposits of $1,100, since the payment stays inside Northfield
   • Reserves of $120, loans of $880 and deposits of $1,100, since reserves leave and deposits stay
   • Reserves of $120, loans of $680 and deposits of $900, since the builder's payment repays the loan
   • Reserves of $120, loans of $880 and deposits of $900: deposits are back, but reserves fell $200
8. 6.

   Zee compares cards A and B. Did Event 1 create money? Which statement is best?

   • Yes, and Event 2 destroys it, since deposits at Northfield fall by $200 when the builder pays
   • No: the loan becomes money once the builder pays the supplier in Event 2, not before
   • No: the $200 came out of existing deposits, so Event 1 just moved money around between accounts
   • Yes: the $200 deposit did not exist before the loan, and Event 2 moves it elsewhere

9. Use this

   Cards A to D on holding money while prices rise (card A is real data; cards B and C are made up). Card A, "Consumer Price Index, annual average". Who made it: the Bureau of Labor Statistics (bls.gov). Table, columns Year | CPI-U (1982-84 = 100): 2018 | 251.107; 2021 | 270.970; 2024 | 313.689. Card B, "Three ways to hold $1,000 from 2018 to 2024 (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: In a jar at home, earning nothing. In a savings account paying 1.0 percent a year. In a certificate paying 3.0 percent a year. Interest is added once a year. Card C, "A fixed lease (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: In 2018 a landlord and a tenant agreed on rent of $1,000 a month, in dollars, for six years. Card D, "Two statements (made up)". Who made it: written for this sheet. Statement 1: Prices rose about 25 percent between 2018 and 2024. Statement 2: A dollar in 2024 buys about 20 percent less than a dollar in 2018.

10. 7.

    Kira uses cards A and B to compare the three ways to hold $1,000 from 2018 to 2024. Which statement fits?

    • The jar lost buying power but the savings account kept it, since it paid 1.0 percent a year
    • Each lost buying power: even the 3 percent certificate grew 19 percent while prices rose 25
    • The certificate gained buying power, since its $1,194 is more than the $1,000 put in
    • The jar and the savings account lost the same buying power, since both earn very little
11. 8.

    Luz compares 2018 to 2021 with 2021 to 2024 on card A. Which statement about inflation fits?

    • Inflation ran at about the same speed in both periods, since each window is three years
    • Inflation ran about twice as fast in 2021-2024 (15.8 percent) as in 2018-2021 (7.9 percent)
    • Inflation ran faster in 2018 to 2021, because the index started from a lower level then
    • Inflation in 2021 to 2024 doubled prices, since the index rose 42.7 points against 19.9 points
12. 9.

    Milo checks both statements on card D against card A. Which verdict is right?

    • Statement 2 is wrong: a 25 percent price rise means a dollar buys 25 percent less
    • Neither can be checked, since annual averages hide the rises that happened within a year
    • Both fit: prices rose 24.9 percent, so a dollar buys 80 cents of what it bought in 2018
    • Statement 1 is wrong: prices rose just 20 percent, the fall in what a dollar buys
13. 10.

    Ren applies card C to the 2018 lease, still at $1,000 a month in 2024. Who gains or loses?

    • Neither gains: the lease fixes the rent at $1,000, so its value cannot change
    • The landlord loses: in 2018 dollars the 2024 rent is worth about $800, a 20 percent cut
    • The tenant loses: the rent in dollars stays $1,000, but prices rose about 25 percent
    • The landlord gains: $1,000 in 2024 is 25 percent more than the same dollars were in 2018