Money, Bank Balance Sheets & the Federal Reserve — Practice · Grade 12 Social Studies

Chapter: Measuring the Economy & Public Policy

What this practice covers

By the end of Money, Bank Balance Sheets & the Federal Reserve you should be able to:

8 questions, written answer, each with a worked explanation.

Vocabulary used: money, asset, liability, liquidity, solvency.

Problem 1

Why is a bank balance not a complete measure of wealth?
Answer and explanation

Wealth includes relevant assets and liabilities at a time. A deposit is one asset to its holder, while debts and other holdings remain outside that balance. Income is another measure, a flow over a period.

Problem 2

Why does a newly created loan deposit not give the borrower equal free net wealth?
Answer and explanation

The borrower receives a deposit asset together with a debt obligation. The initial matching entries increase purchasing capacity but do not remove repayment duties or risk. Net wealth requires comparing assets and liabilities, not only the deposit.

Problem 3

Why is an investment sold at a bank not automatically deposit-insured?
Answer and explanation

Coverage concerns qualifying deposits and applicable conditions, not every product a bank offers. Stocks, bonds, and mutual funds are nondeposit investments with different risks. Identify the product and current official coverage rules.

Problem 4

Why is a policy-rate change not an immediate identical change for every household?
Answer and explanation

Rates transmit through financial conditions, contracts, institutions, and decisions. Households differ in debts, savings, timing, and constraints. Explain the channel and evidence instead of assuming uniform or instantaneous effects.

Problem 5

Invented starting entry: a bank issues a $1,000 loan and credits a matching deposit; fees and later transactions are excluded. Identify assets and liabilities for bank and borrower.
Answer and explanation

The bank holds a $1,000 loan asset and owes a $1,000 deposit liability. The borrower holds the deposit asset and owes the loan obligation. The entry illustrates creation of a deposit with credit, not $1,000 of free net wealth or proof of unlimited bank lending. Later payments, transfers, risk, capital, and liquidity conditions require additional entries and institutional context.

Record the bank’s loan asset and deposit liability.

Record the borrower’s deposit asset and debt.

Distinguish capacity from net wealth.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 6

Is central-bank monetary policy the same as Congress choosing taxes and spending?
Answer and explanation

No. Monetary policy and fiscal policy involve different institutions and instruments, although they interact. Identify the rate or financial-condition tool separately from tax, spending, and borrowing decisions.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 7

A fictional borrower receives a $500 deposit and owes a matching $500 loan, excluding fees. What happens to the starting net position from these entries alone?
Answer and explanation

The new asset and liability offset, so the entries alone do not add $500 of net wealth. They provide purchasing capacity and an obligation. Future interest, spending, valuation, and payments require separate records.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

Problem 8

Can a solvent bank still need immediate liquidity when payments fall due before loan receipts?
Answer and explanation

Yes. Timing can create a cash need even when assets cover obligations under a reliable valuation. Compare dates and funding access. Solvency and liquidity differ, and losses or forced sales can connect the problems.

Response criteria

  • Explain the relevant institution or economic concept accurately; show correct calculations where needed.
  • Connect supplied evidence and stated assumptions to an explained conclusion.
  • Compare feasible options and their effects on different people without stereotypes.
  • Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.

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