The Business of Lending Money: teacher key

How Banks Work, grade 12 edition, written for 12th grade and up. Banks lend out much of their deposits and can create money by making loans. The story runs from the reserve pyramid of 1930 to deposit insurance as of November 2026.

Read the book. Print this page for the key.

Questions and answers

1. What are fictitious reserves?
   • Gold kept in a vault for bank notes
   • Checks two banks counted as cash (answer)
   • Cash held back by credit unions only
2. What happens to money a bank created when the loan is repaid?
   • It is sent to the central bank
   • It becomes new wealth for the bank
   • It is deleted (answer)
3. Why did a bank in trouble in 1930 struggle to get cash?
   • Its partner bank might also face runs (answer)
   • The Fed had locked every discount window
   • Its owners had taken the deposits
4. What did banks have to hold in case borrowers default?
   • Only paper money
   • Capital (answer)
   • Gold and silver
5. A limit that is retroactive applies in what way?
   • Only to new accounts opened later
   • Only to credit unions
   • Back to an earlier date (answer)

Words

• liquidity: cash on hand
• correspondent: partner bank
• collateral: pledged property
• insolvent: unable to pay
• default: fail to repay
• retroactive: counting backward