Author: Lori Alden
Audience: High school
and college economics students
Time required: About 50
Standards: 11 (Role of Money)
Average grade from reviewers:
simulation demonstrates how the Fed can decrease or increase the
money supply through open market operations, and how the banking
system can create money in a fractional reserve system.
Students serve as bankers and members of the public and use balance
sheets to record banking transactions through several rounds of
loans and deposits.
- Download masters for the
simulation (in pdf format, 186 kb), and the student
handout (a Word document, 71 kb).
Use them to make 50 copies of
$10,000 bills, 40 on white paper and 10 on colored paper; 30 copies
of treasury bills, 20 copies of each of the four checks, 4 copies
each of the deposit record and loan record, and 15 copies of each of the four bank promissory notes.
Make 4 transparencies of the blank balance sheets.
Finally, make a copy of the handout for every student.
[Note: As explained by this US
Secret Service website, it's legal to make copies of US currency
if the copies are less than 3/4th the size of the original and
printed on one side only. When printed on 8.5" X 11"
sheets of paper, the copies of the $10,000 bills used in this
exercise are roughly 73.3% of the size of the authentic 6.14" X
- Overhead projector
- Four water soluble pens for
writing on the transparencies.
- Four damp cloths for cleaning the
balance sheet transparencies between rounds.
Distribute a copy of the handout to
each student. Appoint four capable students to serve as
bankers and have them sit at four separate desks at the front of the
classroom. Give each of them copies of the deposit record and
loan record, their bank's checks and promissory notes, a
transparency of a blank balance sheet, a transparency pen, and a
damp cloth for cleaning the transparency. The remaining
students will serve as members of the public and you, the teacher,
will serve as the Federal Reserve System.
Problem 1. Distribute to
members of the public 20 of the treasury bills and all 50 of the
$10,000 bills, making sure that each student gets at least one of
the bills printed on white paper. Have your students calculate
the solution to problem 1.a. on their handouts.
1.a. $500,000 (since treasury bills
aren't counted in the money supply)
Now perform an open market sale by
selling the 10 remaining treasury bills to the public and have
students do problem 1.b.
Next, perform an open market purchase
by buying back 10 treasury bills and have students do 1.c.
Problem 2. Ask members
of the public to deposit all of the currency that's printed on white
paper in banks. Tell them the currency printed on colored
paper represents money that the public wants to hold as cash for
small purchases, and it should not be deposited. For every
$10,000 bill they receive, have the bankers give the depositor a
check and record the depositor's name on the depositor record.
Tell students that each check represents a checking account with
$10,000 in it. When all of the $10,000 bills printed on white
paper have been deposited, do problem 2.
2.a. $100,000, $400,000, and
$500,000. (Remind students that the money supply doesn't
include currency held by banks.)
Have the bankers complete their
balance sheets. The completed sheets might look like this:
that the sum of the two columns on each side of a balance sheet must
always be equal, and that the total amount that is deposited in the
four banks during this round should equal $400,000. Have the
bankers show their balance sheets to the other students on the
overhead projector, and have the students copy the balance sheets
onto their handouts under 2.b.
Problem 3. Have students
do problems 3.a. and b.
3.a. In order to earn
3.b.. Cloud: $50,000,
Piggy: $40,000, Blood: $60,000, River:
that Piggy Bank and River Bank had to lend less than 50% of their
deposits since it's
not possible to divide a $10,000 bill into smaller units.)
Have the four bankers take out
promissory notes equal to the amount of loans they're able to
make. (e.g., Cloud Bank should take out 5 $10,000 promissory
notes.) Have members of the public who wish to borrow come up
to any of the bankers (not necessarily the ones that hold their
deposits), sign promissory notes, and receive $10,000 bills.
Have the bankers record the names of their borrowers on their loan
records. When the banks have loaned as much as they're able,
have them wipe their balance sheets clean and fill them out
again. The new balance sheets might look like these:
Have students record this under 3.c.
Problem 4: Now the
public will find that it has more currency than it wants. Have
students who borrowed money deposit the currency they've received at
any bank they want. After the banks have received the
deposits, have the bankers wipe their transparencies clean and
prepare new balance sheets, then share them with the rest of the
class. The new balance sheets might look like these:
students record this information under problem 4.
Problem 5. Have
students do problems 5.a, b, and c.
5.a. In this example, Cloud
Bank can lend a total of $70,000; Piggy Bank can lend a total of
$70,000; Blood Bank can lend a total of $80,000; River Bank can
lend a total of $60,000.
5.b. Cloud Bank can lend $20,000
more; Piggy Bank can lend $30,000 more; Blood Bank can lend
$20,000 more; River Bank can lend $20,000 more.
5.c. After the loans are made, the
new balance sheets should look like this:
6. In this example, members
of the public should now have $190,000 in currency and $580,000 in
checkable deposits, so the money supply is $770,000. It grew
by $770,000 - $500,000, or $270,000.
The money supply = $100,000 + $400,000 X 1/.2 =
The money supply = $100,000 + $400,000 X 1/.1 =
The money supply = $100,000 + $600,000 X 1/.5 =
The money supply = $100,000 + $600,000 X 1/.2 =
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