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In this lesson, students participate in a demonstration of the money creation process using a large $100,000 bill. Expansions of the money supply caused by successive deposits and loans are traced on the board so that students can observe the process. Required reserves are cut from the large bill during each stage of the process. Students learn to calculate the upper bound of the money creation process using the simple money multiplier.
Students will be able to: 1. Demonstrate how successive deposits and loans by depository institutions cause the money supply to expand. 2. Calculate the simple money multiplier when a required reserve ratio is provided. 3. Explain that money is created when banks make loans and destroyed when loans are repaid.