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

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

   • 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
   • Insolvent in Case 1, since $54 of lost loans is more than the $26 left
4. 3.

   Tala wants evidence on whether Ridgeway's loans are at risk of losing 10 percent. What is missing?

   • How often such loans went unpaid in past downturns, to judge if 10 percent is likely
   • How much equity other banks hold, to compare their balance sheets with Ridgeway's
   • How many depositors Ridgeway has, since more depositors would make the bank safer
   • What interest Ridgeway pays on deposits, since that decides whether loans are repaid

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
   • $350,000, since the family's $850,000 less two $250,000 limits leaves $350,000
   • $0, since the family's accounts fall in three categories and each category is covered
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 into Owner 2's single account at Bank X, making it exactly $250,000
   • Moving $50,000 to a single account in Owner 1's name at another insured bank
   • 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?

   • The joint account is owned equally, so each owner's share is $175,000
   • 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

9. 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.

10. 7.

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

    • Weak: prices rose each year while M2 fell in the last two, so M2 growth alone explains little
    • Disproved: M2 fell after 2022, so money growth cannot have raised prices in 2022
    • Strong: M2 and prices both grew in 2021-2022, so money growth caused prices to rise
    • Strong: M2 grew 10.5 percent and prices 7.9 percent, which is the same pattern in both series
11. 8.

    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
    • Not supported: M2 fell 3.7 percent in two years, yet the CPI-U rose 9.4 percent
    • Supported: M2 has fallen in both years since 2022, so prices should follow in time
    • Supported: M2 fell and the CPI-U rose more slowly each year, 6.0 percent then 3.2 percent
12. 9.

    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?

    • 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 student should use the CPI-U for each month, not February, since February is a special month
    • The ratio is 0.75, so prices rise less than M2 and money growth cannot be to blame
13. 10.

    Milo asks what evidence would best test Writer 1's claim. Which missing figure helps most?

    • The average wage in each year, to see whether pay rose faster than prices did in those four years
    • How many dollars the Federal Reserve printed in 2021, to count the cash that is inside M2 itself
    • Many countries' M2 and inflation across years, to see if faster M2 growth goes with higher inflation
    • Next year's M2 and CPI-U figures for the United States, to add a fifth row to card A's table of years