What money is, and how banks create money by lending
Grade 12 Social Studies Worksheet
Circle the best answer.
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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.
Jun applies card A to a first deposit of $1,000. Which statement about the model is right?
- At most $11,000 results, which is the $10,000 plus the first $1,000 deposit
- At most $10,000 is new money, since the multiplier is 1 ÷ 0.10 = 10 times the deposit
- At most $9,000 of the $10,000 in deposits is new, since $1,000 was already deposited
- At most $900 more is created, since the bank lends 90 percent of the first deposit
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 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
- It means banks hold no reserves, so card C's reserve figures must be wrong
Tala tests the student's claim on card D against cards B and C. What is the best verdict?
- Supported: both fell from 2022 to 2024, and card B changes just the ratio, not reserves
- Disproved: card B ends the requirement, so reserves play no part in how banks lend
- Weak: reserves rose 125 percent and M2 40 percent in 2020 to 2022, with no required ratio
- Supported: reserves and M2 both rose from 2020 to 2022, so reserves drove the growth in M2
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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.
Ari follows Events 1 and 2 on card C. After both, what does Northfield's balance sheet show?
- Reserves of $120, loans of $880 and deposits of $900: deposits are back, but reserves fell $200
- 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 $320, loans of $880 and deposits of $1,100, since the payment stays inside Northfield
Zee compares cards A and B. Did Event 1 create money? Which statement is best?
- 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
- Yes, and Event 2 destroys it, since deposits at Northfield fall by $200 when the builder pays
A student says Northfield lent $200 of its depositors' savings. Noah tests the claim. What is the best verdict?
- Shown: reserves fall by $200 when the builder pays, so savings must have funded the loan
- Shown: Northfield's $900 of deposits is the source of the $200 it lent
- Not shown: the loan came from crediting a new $200 deposit; reserves fell only in Event 2
- Wrong: Northfield lent $200 of its own equity, since equity is the bank's own money
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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.
Kira uses cards A and B to compare the three ways to hold $1,000 from 2018 to 2024. Which statement fits?
- Each lost buying power: even the 3 percent certificate grew 19 percent while prices rose 25
- The jar lost buying power but the savings account kept it, since it paid 1.0 percent a year
- The jar and the savings account lost the same buying power, since both earn very little
- The certificate gained buying power, since its $1,194 is more than the $1,000 put in
Luz compares 2018 to 2021 with 2021 to 2024 on card A. Which statement about inflation fits?
- 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
- 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)
Milo checks both statements on card D against card A. Which verdict is right?
- Statement 1 is wrong: prices rose just 20 percent, the fall in what a dollar buys
- Both fit: prices rose 24.9 percent, so a dollar buys 80 cents of what it bought in 2018
- 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
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 tenant loses: the rent in dollars stays $1,000, but prices rose about 25 percent
- The landlord loses: in 2018 dollars the 2024 rent is worth about $800, a 20 percent cut
- The landlord gains: $1,000 in 2024 is 25 percent more than the same dollars were in 2018