Economics · Grade 12

Active learning ideas

The Banking System and Money Creation

Active learning works well for this topic because students often misunderstand money creation as a simple process of moving existing funds. Through simulations and role-plays, they see how banks generate new money through lending, making abstract concepts tangible and memorable.

• Ontario Curriculum Expectations
• CEE.EE.17.1
• CEE.EE.17.2

• 25–45 min
• Pairs → Whole Class
• 4 activities

Activity 01

• Simulation Game
• 45 min · Small Groups

Simulation Game: Fractional Reserve Banking Rounds

Divide class into small groups as banks. Provide initial $1,000 deposit tokens; each bank keeps 10% reserves and lends the rest as new tokens to other groups. Run three rounds, then calculate total money supply expansion using the multiplier formula. Groups present their results.

Explain the role of fractional reserve banking in money creation.

Facilitation Tip

In Lending Decision Debates, assign roles (e.g., bank manager, borrower, economist) and require students to use data from their balance sheets to justify their positions.

What to look for

Present students with a scenario: A bank receives a $5,000 deposit and the reserve ratio is 20%. Ask them to calculate the initial amount the bank can lend out and the maximum potential increase in the money supply using the money multiplier formula. Review answers as a class.

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

Activity 02

• Simulation Game
• 25 min · Pairs

Pairs: Money Multiplier Scenarios

Pairs receive worksheets with reserve ratios from 5% to 20%. They calculate multipliers and potential money supply changes for $5,000 deposits. Discuss how Bank of Canada adjustments affect outcomes, then share one scenario with the class.

Analyze how banks facilitate economic activity through lending.

What to look for

Pose the question: 'What are the potential consequences for the Canadian economy if the Bank of Canada significantly lowered the reserve ratio?' Facilitate a discussion where students debate both the positive impacts (e.g., increased lending, economic growth) and negative impacts (e.g., inflation, risk of bank runs).

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

Activity 03

• Simulation Game
• 35 min · Whole Class

Whole Class: Bank Balance Sheet Walkthrough

Project a simplified Royal Bank balance sheet. Guide students to identify reserves, loans, and deposits. In pairs, they trace a $100,000 loan's path through the system, updating a shared class chart to show money creation.

Calculate the money multiplier and its implications for the money supply.

What to look for

On an exit ticket, have students write two sentences explaining how banks create money and one sentence describing the relationship between the reserve ratio and the money multiplier.

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

Activity 04

• Simulation Game
• 40 min · Small Groups

Small Groups: Lending Decision Debates

Groups review mock loan applications and decide reserves versus lending based on economic scenarios. Track money creation over rounds, then debate risks like over-lending. Compile class data to graph supply impacts.

Explain the role of fractional reserve banking in money creation.

What to look for

Present students with a scenario: A bank receives a $5,000 deposit and the reserve ratio is 20%. Ask them to calculate the initial amount the bank can lend out and the maximum potential increase in the money supply using the money multiplier formula. Review answers as a class.

• Apply
• Analyze
• Evaluate
• Create
• Social Awareness
• Decision-Making

A few notes on teaching this unit

Teachers should avoid presenting money creation as a mechanical formula. Instead, use simulations to show how lending cycles expand the money supply, then layer in constraints like leakages. Research suggests students grasp the multiplier better when they experience the process firsthand rather than memorizing formulas.

Successful learning looks like students accurately explaining how fractional reserve banking creates money and applying the money multiplier with real-world constraints. They should critique lending decisions and describe the central bank’s role in stabilizing the system.

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Watch Out for These Misconceptions

• During the Bank Balance Sheet Walkthrough, observe if students conflate the Bank of Canada’s role with commercial banks’ lending functions.

  Use the balance sheet to highlight the central bank’s assets and liabilities versus those of commercial banks, then hold a quick comparison discussion to clarify their distinct roles.

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Methods used in this brief

• Simulation Game