What money is, and how banks create money by lending

Grade 12 Social Studies Worksheet - Challenge Me

Circle the best answer.

1. Read this first

   Use this

   Cards A to D on how safe a bank is (cards A, B and D are made up; card C is a summary). Card A, "Ridgeway Bank's balance sheet (made up)". Who made it: written for this sheet. Table, columns Item | Amount: reserves | $100; loans | $900; deposits | $920; equity | $80. Card B, "Two loan-loss cases (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: Case 1: 6 percent of Ridgeway's loans are never repaid. Case 2: 10 percent are never repaid. Unpaid loans are removed from assets, and nothing else on the sheet changes. Card C, "Deposit insurance". Source: Federal Deposit Insurance Corporation, read November 2026. Summary in our words, not a quotation: The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Card D, "Headline (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: Ridgeway's assets exceed its deposits, so every depositor is safe and Ridgeway is safe from a run.

2. 1.

   Bo tests the headline on card D against cards A and B. What is the best verdict?

   • Not shown: equity is $80, so losses above about 9 percent of loans put assets under deposits
   • Shown: assets of $1,000 exceed deposits of $920, so loan losses cannot reach depositors
   • Partly: assets exceed deposits, so Ridgeway cannot fail, but a run could still empty reserves
   • Not shown: Case 1 already puts Ridgeway's assets below its deposits of $920
3. 2.

   Pia applies card B to card A. For each case, is Ridgeway solvent, and who bears any loss?

   • Insolvent in Case 1, since $54 of lost loans is more than the $26 left
   • Solvent in Case 2 but not in Case 1, since the larger loss spreads over more of the bank's loans
   • Solvent in Case 1 (equity $26); in Case 2 equity is −$10, so depositors or the insurer bear $10
   • Solvent in both cases, since $80 of equity covers a loss of $54 and a loss of $90 alike
4. 3.

   A treasurer says Ridgeway is safe from a run. What is Esme's strongest objection from cards A to D?

   • Reserves of $100 exceed the $80 of equity, so any run is covered by the bank's own funds
   • Loan losses of 6 percent would start a run, since equity falls to $26 and signals a danger
   • Loans cannot become cash at once, so a run on 11 percent of deposits would empty reserves
   • The FDIC insures deposits, so depositors have no reason to run and reserves are not needed

5. Use this

   Cards A and B on a family's accounts (card A is a summary; card B is made up). Card A, "Deposit insurance". Source: Federal Deposit Insurance Corporation, read November 2026. Summary in our words, not a quotation: The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Deposits in the same category at the same bank are added together. A joint account is its own category: each co-owner is insured up to $250,000 for that co-owner's share. Card B, "The Okafor family at Bank X (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: Owner 1 has a single account of $300,000. Owner 2 has a single account of $200,000. The two together have a joint account of $350,000, owned equally. All three accounts are at Bank X, an insured bank. The family has no other accounts anywhere.

6. 4.

   Jun applies card A to the family's accounts on card B. How much is uninsured, and where?

   • $50,000, all in Owner 1's single account, since $300,000 is over the $250,000 limit
   • $100,000, since the joint account's $350,000 is over a single $250,000 limit
   • $0, since the family's accounts fall in three categories and each category is covered
   • $350,000, since the family's $850,000 less two $250,000 limits leaves $350,000
7. 5.

   Owner 1 wants $300,000 fully insured. Ren checks plans against card A. Which plan would still leave $50,000 uninsured?

   • Moving $50,000 to a single account in Owner 1's name at another insured bank
   • Moving $50,000 into Owner 2's single account at Bank X, making it exactly $250,000
   • Adding $50,000 to the joint account at Bank X, making it $400,000 owned equally
   • Opening a second single account at Bank X and splitting the $300,000 across both
8. 6.

   Before moving money, Luz asks which fact shows why Owner 1 needs to act. Which fact matters most?

   • Owner 1 has a $300,000 single account, above the $250,000 limit
   • Owner 2 has a $200,000 single account and also shares the joint account
   • Bank X may be a small bank, and small banks insure less than $250,000
   • The joint account is owned equally, so each owner's share is $175,000
9. 7.

   A relative says to put the whole $850,000 in one joint account to be safe. What is Noah's strongest objection?

   • The joint account would leave $300,000 uninsured, as Owner 1's account does today
   • A joint account insures $250,000 per co-owner, so $850,000 in one leaves $350,000 over
   • A joint account is insured as one account at $250,000, which would leave $600,000 uninsured
   • Joint accounts are not insured by the FDIC, so the family would lose its protection

10. Use this

    Cards A to C on money and prices (card A is real data; cards B and C are made up). Card A, "M2 and the CPI-U, each February". Who made it: FRED, the Federal Reserve Bank of St. Louis, and the Bureau of Labor Statistics. Table, columns Year | M2 (billions of dollars) | CPI-U (1982-84 = 100): 2021 | 19,641.4 | 263.014; 2022 | 21,706.0 | 283.716; 2023 | 21,241.6 | 300.840; 2024 | 20,896.0 | 310.326. Card B, "Writer 1 (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: M2 grew in 2021-2022 and prices grew in the same year, so growth in the money supply causes prices to rise. Card C, "Writer 2 (made up)". Who made it: written for this sheet. Summary in our words, not a quotation: M2 has fallen since 2022, so prices should now be falling too.

11. 8.

    Kira tests Writer 1's claim on card B against card A. What is the best verdict?

    • Strong: M2 and prices both grew in 2021-2022, so money growth caused prices to rise
    • Weak: prices rose each year while M2 fell in the last two, so M2 growth alone explains little
    • Strong: M2 grew 10.5 percent and prices 7.9 percent, which is the same pattern in both series
    • Disproved: M2 fell after 2022, so money growth cannot have raised prices in 2022
12. 9.

    Zee tests Writer 2's claim on card C against card A. What is the best verdict?

    • Not supported: M2 fell 3.7 percent while prices fell 9.4 percent, so both moved together
    • Supported: M2 fell and the CPI-U rose more slowly each year, 6.0 percent then 3.2 percent
    • Supported: M2 has fallen in both years since 2022, so prices should follow in time
    • Not supported: M2 fell 3.7 percent in two years, yet the CPI-U rose 9.4 percent
13. 10.

    A student says each 1 percent of M2 growth adds 0.75 percent to prices (10.5 and 7.9 in 2021-2022). What is Ari's strongest objection?

    • The student should use the CPI-U for each month, not February, since February is a special month
    • Percent changes in M2 and the CPI-U cannot be compared, since one is in billions and one an index
    • One year cannot fix a link; in the next two years M2 fell while prices still rose
    • The ratio is 0.75, so prices rise less than M2 and money growth cannot be to blame