This exercise will have students explore the creation of money and the deposit expansion multiplier. It can also serve as a tool to explore the impact of a change in the reserve requirement if the instructor desires to repeat the project using a higher or lower reserve requirement.

Split the class into groups of four. The students in each group count off 1 through 4. The 1s will be bank 1, the 2s, bank 2, the 3s, bank 3, and the 4s, bank 4. The exercise starts with each bank having zero deposits and zero excess reserves. Assume the reserve requirement is 20 percent. Then bank 1 receives a deposit of $1,000. Each group will simulate the money creation process by having bank 1 make the maximum loan possible, with the loaned money being deposited in bank 2. Then bank 2 makes the maximum loan possible, and the loaned funds go to a deposit in bank 3. Bank 3 makes the maximum loan possible with the funds going to bank 4. Finally, bank 4 makes the maximum loan possible. Including the initial deposit of $1,000, how much money has been created in this exercise by all the banks?

Answer: $5,000