1. Collect materials needed:
A roll of 40 nickelsActivity 1
, 5 copies, printed on white paper and cut apartActivity 2
, fill in date, make 5 copies on colored paper, and cut apartActivity 3
, 3 copies cut apartActivity 4
, one per studentVisual 1
, one copy for each studentVisual 2
, one copy for each student
Shoe box or other container to store deposits
to the students that over the next few days they are going to learn
more about the purposes and functions of the Federal Reserve System.
Tell them that the Federal Reserve is our nation’s central bank.
Discuss the following:
- Why do people use banks?
(Banks provide financial services to individuals, businesses, and state and
local governments. These services include checking accounts, savings
accounts, certificates of deposit, loans, safe deposit boxes, ATMs, etc.)
b. Why do people keep their money in banks?
(It’s more secure in a bank than it is sitting in a box at home. If you keep
money in a checking account at a bank, you can write checks and
initiate electronic payments against the balances in the account. Banks
also pay interest on many of the accounts they offer.)
c. How do banks make money?
(Banks make money by taking in deposits and making loans. They charge a higher
interest rate on their loans than they pay on the deposits they take
in. Banks also make money by charging fees for the services they
provide to their customers.)
3. Tell students that you are going to open a classroom bank. This bank
will be unique because it will accept only deposits and make loans in
dollar bills. Tell students that you, the bank manager, will be paying
5 percent interest on all deposits. Have the students take out any
dollar bills they have in their pocket. Choose or have the class elect
a Recorder for the bank. Remind students that the classroom bank will
accept only deposits of dollar bills—no other denomination of notes and
no coins will be accepted.
4. Explain to the students that they will get all of their dollars back
before the end of the class and that you will pay a nickel for each
dollar deposited in the bank during the class period. Tell the students
that when a bank offers 5 percent interest, it is usually referring to
an annual rate of interest of 5 percent, but that you will assume this
class period represents a full year. Anyone who deposits a dollar in
the bank at the beginning of the class will withdraw the dollar at the
end of the class period and get one nickel (5 percent) in interest paid
by you, the bank manager.
5. Display Visual 1. Distribute a copy of Visual 1 to each student.
Instruct the Recorder to record the names of the depositors and the
amount they deposit in the bank on Visual 1 as each person gives you a
deposit. Ask the students to follow along, recording the deposits on
their copy of Visual 1.
6. Ask the students who wish to deposit dollar bills in the new bank to raise their hands.
Distribute one deposit slip from Activity 1 to the first 12 students
who wish to deposit dollar bills in the new bank. If fewer than 12
students want to deposit dollar bills, that’s okay, but encourage at
least a total of $10 in deposits. Limit the total number of dollar
bills each student is allowed to deposit to no more than three dollar
bills. Ask those students with deposit slips to complete them and line
up in front of you in preparation to make their deposits.
7. Take the deposit from the first student. Paperclip the money to the
deposit slip. Place the money and deposit slip in the shoe box or other
container you are using to store deposits. Announce the name of the
student and the amount she is depositing. Watch as the. Recorder enters
the name of the depositor and the amount she deposited on Visual 1.
Instruct the students to also enter the name of the first depositor and
the amount she has deposited on their copy of Visual 1. Complete and
issue a deposit receipt from Activity 2 to the depositor. Once the
deposit transaction is completed, ask the student to return to her
seat. Continue accepting deposits and issuing deposit receipts until
all students who wish to deposit dollar bills have made their
transactions or 12 students have deposited their money, whichever comes
first. Put the box containing the dollar bills away in a safe place.
8. Have the students add up the total deposits. Ask the Recorder to enter the total deposits on Visual 1.
9. Ask the students whether any of them would like to borrow money from the bank.
Distribute one loan application from Activity 3 to the first 12
students who wish to borrow dollar bills from the bank. Explain that
each borrower may apply for one, two, or three dollars. Offer the loans
at 0 percent interest. While fewer than 12 students may wish to borrow
from the bank, encourage at least $10 total to be borrowed from the
bank. After the students who wish to borrow money have completed their
loan applications, ask them to line up in front of you.
Explain to the students that banks review the creditworthiness of
borrowers before making loans, but that in this classroom example, you
are going to assume that a credit check has been conducted and that all
of the students who apply will be getting loans.
instead of giving cash to each approved borrower, you will open a bank
account for each borrower and put the loaned money in the account. You
will issue each borrower a receipt for money deposited in the new bank
Take the loan application from the first student. Approve the loan
application of the first student. Announce the name of the student and
the amount he is borrowing. Instruct the. Recorder to enter the name of
the borrower and the amount he borrowed on Visual 1. Tell the students
to also enter the name of the first borrower and the amount he has
borrowed on their copy of Visual 1. Complete and issue a deposit
receipt from Activity 2 in the amount of the loan to the borrower. Once
the loan transaction is completed, ask the student to return to his
seat. Continue accepting loan applications, making loans, and issuing
deposit receipts until all students who wish to borrow dollar bills
have made their transactions or 12 students have deposited their money
or the value of the total loans equals the value of total deposits,
whichever comes first.
the students add up the number of dollar bills loaned out by the bank.
Ask the Recorder to enter the total loans on Visual 1.
13. Discuss the following:
- How many people have deposit receipts? (Answers will vary.)
b. What is the total value of those deposit receipts? (Amount will be the total of deposits and loans in the bank.)
c. Has the bank loaned out all of the money it accepted in deposits? (Answers will vary.)
d. Could all of the people who have deposit receipts withdraw the money in cash in their accounts? (No.)
e. What would happen if all of the people that have deposit receipts
came to the bank on the same day to withdraw money in cash? (Not
everyone would be able to get money out. The bank would have to make
decisions about which depositors got their money out, or the bank would
have to stop honoring withdrawal requests.)
14. Explain the following:
• The United States, and most of the world, has a fractional reserve banking system.
• Bank reserves are
the amount of deposits not loaned out by banks. A bank’s reserves can
be calculated by subtracting a bank’s total loans from its total
deposits. Ask the students to calculate Classroom Bank’s current
reserves. (Answers will vary.) Write this number on the board. If the total reserves are 0, ask the students why this would cause a problem. (If
Classroom Bank’s reserves are 0, then if any of the depositors come in
to make a withdrawal, there would be no cash on hand to honor the
• In a fractional reserve banking system,
banks take in deposits and lend most of the money they take in. People
who borrow money from banks use that money to buy houses or cars, start
businesses, make home improvements, go to college, etc.
• Unlike in the Classroom Bank, the money loaned out by real banks does
not sit in bank accounts—it gets spent almost immediately by the
borrowers. Only a small fraction of the amount deposited in banks is
kept on reserve, either in electronic accounts at the Federal Reserve
or in vault cash. The result is that not everyone can get their money
out of the bank in cash on the same day.
• The Federal Reserve requires most banks to hold a portion, up to 10
percent, of their deposits in reserve. These are called required reserves. Ask the students whether Classroom Bank is currently meeting a 10 percent reserve requirement. (Answers will vary.)
• Throughout history, there have been episodes where too many people
tried to take their money out of their banks at the same time. During
such episodes, banks usually ran out of cash and therefore couldn’t
honor withdrawal requests, and many banks went bankrupt. When a bank
goes bankrupt, it’s called a bank failure. When many depositors run into a bank at the same time to get their money out, we call that a bank run. When a bank run that begins at one bank spreads to other banks and causes people to generally distrust banks, we call that a bank panic.
15. Ask the students who deposited money in Classroom Bank the following:
Suppose you learned that the bank owner and manager was planning to
leave the country and move permanently to Tahiti. What would you do? (Most
students will say that they would want to withdraw their money
immediately from the Classroom Bank, since they have no guarantee that
you aren’t going to take their money with you when you move to Tahiti.)
16. Display Visual 5. Explain to students that:
• Monetary policy involves the Fed is changing the money supply in
order to affect interest rates with the goal of price stability, full
employment, and maximum sustainable economic growth.
• The Fed has at its disposal three tools of monetary policy:
- Reserve Requirements—The
Fed can increase the reserve requirement and thereby reduce the money
supply as banks are forced to hold more reserves and lend less.
Likewise, the Fed can decrease the reserve requirement and increase the
money supply as banks are able to loan more. However, changes in the
reserve requirement are made very infrequently and represent an extreme
measure for affecting the money supply. Early in the Fed’s history,
reserve requirements were fixed by law. The Thomas amendment to the
Agricultural Adjustment Act of 1933 first gave the Fed power to change
reserve requirements. That power was made permanent by the Banking Act
b. Discount Rate—The discount rate, the rate at which banks can borrow from the
Federal Reserve can be increased in order to reduce the money supply
and decreased in order to increase the money supply. Banks usually
don’t borrow much from the Federal Reserve. Therefore, a change in the
discount rate has a relatively small effect on the money supply. Early
in the Fed’s history, changes in the discount rate were the primary
monetary policy tool available to the Fed.
c. Open Market Operations—Open
market operations, the Fed’s purchases and sales of U.S. Treasury
securities, are the primary tool of monetary policy. Open market
operations are carried out almost every business day by the Trading
Desk at the Federal Reserve Bank of New York. The New York Reserve Bank
carries out these operations on behalf of the entire Federal Reserve
System. The Trading Desk is actually a staff of people who work at the
Federal Reserve Bank of New York and who buy and sell government
securities in order to change the money supply and get the federal
funds rate, the interest rate that banks charge each other for
short-term, usually overnight loans, as close as possible to the target
for that interest rate set by the FOMC.
Using the information on the Federal Reserve System, the Board of
Governors, the Federal Open Market Committee, and previous lessons fill
in the blanks Activity 4 so as to accurately portray the structure of
the Federal Reserve System.
18. Go over the results as a class.
For extra credit the students can define the basic concepts of Bank Failure,
Federal , Reserve System, and
the Fractional Reserve Banking System.
National Standards Standard 1 : Scarcity
Productive resources are limited. Therefore, people can not have all
the goods and services they want; as a result, they must choose some
things and give up others.
Capital Resources, Choice, Consumer Economics, Consumers, Goods, Human
Resources, Natural Resources, Opportunity Cost, Producers, Production,
Productive Resources, Scarcity, Services, Wants, Entrepreneurship,
Inventors, Entrepreneur, Factors of Production Standard 10 : Role of Economic Institutions
Institutions evolve in market economies to help individuals and groups
accomplish their goals. Banks, labor unions, corporations, legal
systems, and not-for-profit organizations are examples of important
institutions. A different kind of institution, clearly defined and
enforced property rights, is essential to a market economy.
Legal and Social Framework, Mortgage, Borrower, Interest, Labor Union,
Legal Forms of Business, Legal Foundations of a Market Economy,
Nonprofit Organization, Property Rights, Banking Standard 11 : Role of Money
Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services.
Related concepts: Exchange, Money Management, Money Supply, Currency, Definition of Money, Money, Characteristics of Money, Functions of Money Standard 16 : Role of Government
There is an economic role for government in a market economy whenever
the benefits of a government policy outweigh its costs. Governments
often provide for national defense, address environmental concerns,
define and protect property rights, and attempt to make markets more
competitive. Most government policies also redistribute income.
Externalities, Income, Natural Monopoly, Redistribution of Income, Role
of Government, Taxation, Transfer Payments, Bonds, Distribution of
Income, Income Tax, Maintaining Competition, Monopolies, Negative
Externality, Non-clearing Markets, Positive Externality, Property
Rights, Public Goods, Maintaining Regulation, Taxes, Regulation,
Government Expenditures, Government Revenues Standard 20 : Monetary and Fiscal Policy
Federal government budgetary policy and the Federal Reserve System's
monetary policy influence the overall levels of employment, output, and
Inflation, National Debt, Tools of the Federal Reserve, Discount Rate,
Federal Budget, Fiscal Policy, Monetary Policy, Open Market Operations,
Reserve Requirements, Budget, Budget Deficit, Central Banking System,
Budget Surplus, Causes of inflation