Author:  Lori Alden

Audience:  High school and college economics students

Time required:  About 50 minutes.  

NCEE Standards:  11 (Role of Money)

Average grade from reviewers:  A (1 review)

Summary:  This 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 2.61" bills.]
  • 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.

1.b. $400,000 

Next, perform an open market purchase by buying back 10 treasury bills and have students do 1.c.

1.c. $500,000.

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:

Notice 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 interest income.  

3.b..  Cloud:  $50,000, Piggy:  $40,000, Blood:  $60,000, River:  $40,000.  (Notice 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:

Have 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:

Problem 6.  

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.

Problem 7.  

7.a.  The money supply = $100,000 + $400,000 X 1/.2 = $2,100,000.  

7.b.  The money supply = $100,000 + $400,000 X 1/.1 = $4,100,000.  

7.c.  The money supply = $100,000 + $600,000 X 1/.5 = $130,000.  

7.d.  The money supply = $100,000 + $600,000 X 1/.2 = $3,100,000.  


Lori Alden, 2005-7.  All rights reserved.  You may download the content, provided you only use the content for your own personal, non-commercial use.  Lori Alden reserves complete title and full intellectual property rights in any content you download from this web site. Except as noted above, any other use, including the reproduction, modification, distribution, transmission, republication, display, or performance, of the content on this site is strictly prohibited.