Week 9 — Money Creation Report: Reserves, Loans, and the Multiplier's Ceiling — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 8 of the term — work four short money-creation problems, explain what each figure means, and tell a cousin what a headline about the money multiplier does and does not say.

This week you learned to split a deposit into required reserves and excess reserves, to follow a loan as it becomes someone else's deposit, to compute the money multiplier and the largest money supply a monetary base can support, and to treat that figure as a ceiling. In Week 7 you met the spending multiplier and in Week 8 you built the flow-vs-stock habit. In this assignment you work four short problems, interpret each one, and explain to a cousin what a headline about the money multiplier does and does not say. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles.

The task

This report uses the week's illustrative numbers, constructed for this course and not real data: a café owner's deposit of 1,000 dollars, a required reserve ratio of 0.10, a monetary base of 105 dollars, and banks that may choose to keep an extra 0.10 of each deposit as excess reserves.

Work these four problems, showing every step on its own line:

1. In the illustrative deposit chain, a café owner deposits 1,000 dollars at a bank, and the required reserve ratio is 0.10. How much does the bank lend, in dollars?
2. In the same illustrative chain, the first bank's loan is spent and deposited at a second bank, with the required reserve ratio still 0.10. How much does the second bank lend, in dollars?
3. In the illustrative banking system, the monetary base is 105 dollars and the required reserve ratio is 0.10. In the classroom model, what is the largest money supply the base can support, in dollars?
4. In the same illustrative banking system, banks choose to keep an extra 0.10 of each deposit on top of the required 0.10. What is the new ceiling on the money supply, in dollars?

Beside each figure, add one brief interpretation in plain words. For problem 1, say what the loan means for the banking system, and why the bank lends this amount rather than its required reserves. For problem 2, say what the second loan means, and why each round of the chain is smaller than the one before. For problem 3, say what the ceiling means for the money supply, and why the spending multiplier, 1 divided by 1 minus the MPC, does not answer this question. For problem 4, say what the new ceiling means, and why the money multiplier is a ceiling and not a forecast, naming one leak other than extra reserves.

Explain it to a non-expert

A cousin who runs a small landscaping business reads a headline that says banks can turn every dollar of reserves into 10 dollars of money, and asks whether her deposit will be lent out 10 times over. Write a 3–5 sentence message your cousin could follow: what a bank does with a deposit in everyday words, how a loan becomes someone else's deposit, and one honest limit of the headline, such as the fact that required reserve ratios in the United States have been zero since March 2020 and real-world multipliers are far smaller than the classroom model. Explain any technical term in everyday words. More than one good limit can be defended.

For a different, ungraded example, imagine a roommate who keeps 2,000 dollars in a savings certificate that cannot be cashed for six months and asks whether that is money she can use for next week's rent. Model message: "The certificate is still yours, so it is part of what you own, but it is not ready to spend. Economists count it in a broad measure of money, not in the narrow measure that covers cash and checking you can use right away. For rent next week, only cash or a checking balance will do. If you broke the certificate early, you might give up some interest, which is a cost the bank sets, not a rule of economics."

Use that pattern for your cousin's question, with your own explanation.

Here is one honest note about scope: every number in this assignment is illustrative, so do not add a real reserve, money-supply, or multiplier figure from the news. The classroom multiplier is a model of how deposits multiply, which is why this report keys only on the model's numbers.

How to work

1. Draft all four figures, the four brief interpretations, and your message for your cousin.
2. Check your draft against the attached scoring criteria, criterion by criterion: does each bank keep its required reserves and lend the excess, is the money multiplier used instead of the spending multiplier, is every ceiling called a ceiling, and is every figure explained in plain words?
3. Revise at least one calculation or explanation, and write two or three sentences on what you changed and why.

Deliverables

Submit your money-creation report with all four figures, their brief interpretations, your message for your cousin, and your two or three sentences on the revision. You may submit it written, recorded as audio or video with a transcript, or as a labelled sketch of each bank's ledger with a short note; every form is graded by the same scoring criteria.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, reasoning, and explanations must be your own work. This version is built to be completed without any AI tool, and no part of it requires one. Use the chapter, your notes, and a calculator or spreadsheet, and show every step so your work can be checked. Do not copy another student's figures or wording.

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