DSE Economics | Money and Banking: Tutor Lesson Plan

2026-11-03

Tutor lesson-prep guides · Secondary Economics

Students can recite M1, M2 and M3 yet hesitate over time deposits, and treat the money multiplier as pure arithmetic. This lesson follows one 1,000 dollar deposit: classify it, multiply it, then finish with the real interest rate.

Objectives — Students can: (1) name the four functions of money with examples; (2) compute M1 as 1,000 from 200 cash and 800 demand deposits, and M2 as 2,500 after 1,500 of savings and time deposits; (3) use a 20 % reserve ratio to get a multiplier of 5, so 1,000 creates at most 5,000 in deposits and 4,000 in credit; (4) find a real rate of 2 % from 5 % nominal and 3 % inflation.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Functions of money	Paying by Octopus uses which function?	Medium of exchange
Percentages	What percentage is 1,500 of 2,500?	60 %
Reciprocals	What is the reciprocal of 0.20?	5
Real versus nominal	Pay rises 10 % and prices 15 %: does purchasing power rise?	It falls, about -4.3 %

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-8 min	What counts as money	Ask whether Octopus, cards or cash are money	Write a reason for each
8-18 min	M1, M2 and M3	Add 200 plus 800, then 1,500	Compute all three layers
18-30 min	Deposit creation	Run 1,000 through 20 % reserves round by round	Write the first two rounds
30-42 min	The multiplier	1/rrr gives 5, compare with the actual multiplier	State when the formula fails
42-52 min	Rates and inflation	5 % minus 3 % is 2 %, then check with Fisher	Compute a real rate
52-60 min	Practice and exit	Three questions in eight minutes	Check and label errors

03 Teaching script (read it out)

Scene 1: The money layers rank liquidity, not value

M1 is the most liquid: 200 in cash plus 800 in demand deposits, so 1,000, spendable immediately. M2 adds 1,500 of savings and time deposits for 2,500, which must be transferred first. M3 adds longer instruments. Students must accept that time deposits are money with lower liquidity, so any question about M2 includes them. This is the most examined layer.

Ask whether a fixed deposit in their own bank account is money, and make them justify the answer.

Scene 2: Deposit creation runs through lending and redepositing

With 1,000 deposited and a 20 % reserve ratio, the bank keeps 200 and lends 800. The borrower deposits 800 elsewhere, that bank keeps 160 and lends 640, and so on. Total deposits cap at 1,000 times 5, which is 5,000, and the credit created is 4,000. Students must state three conditions: willing borrowers, redeposit inside the banking system, and banks holding only the required reserves.

Have them explain in speech why it is not 5,000 at once, until they say “round by round”.

Scene 3: The real rate measures purchasing power, and Fisher matters at high inflation

5 % nominal against 3 % inflation gives roughly 2 %. The exact Fisher form is 1.05 / 1.03 – 1, which is 1.94 %; the gap is small here but grows with inflation. The actual multiplier is money supply over the monetary base, 2,500 over 500, which is 5 and matches the theoretical value; an actual multiplier above 1/rrr means the classification or the base is wrong.

Run 6 % nominal against 10 % inflation and compare the rough and exact answers.

04 Question types and worked steps

Type	Example	Steps	Answer
Money supply layers	Cash 200, demand 800, time 1,500	M1 is cash plus demand, M2 adds savings and time, state the unit	M1 = 1,000; M2 = 2,500
Deposit creation	Initial deposit 1,000, rrr 20 %	Multiplier 1/rrr, total deposits, credit is the excess	5,000 and 4,000
Actual multiplier	M2 2,500, base 500	Divide supply by base, compare with 1/rrr, explain the gap	5
Real interest rate	Nominal 5 %, inflation 3 %	Subtract roughly, confirm with Fisher, state the direction	About 2 % (1.94 %)

Sanity check (teach this): Direction check: total deposits of 5,000 exceed the initial 1,000 and credit of 4,000 is smaller than total deposits, so the relationships hold. A real rate of 2 % below the 5 % nominal is right because prices erode purchasing power. The actual multiplier matching 5 shows the classification is consistent; a result of 0.2 means the ratio was inverted.

05 Independent practice (3 questions)

Question	Answer	What to watch
Cash 300, demand 700, time 1,000: find M1 and M2.	M1 = 1,000; M2 = 2,000	Is time deposit wrongly counted in M1
rrr falls from 20 % to 10 %: how does the multiplier change?	From 5 to 10	Did they take the reciprocal
Nominal 4 %, inflation 6 %: sign of the real rate?	About -1.9 %, negative	Did they state that purchasing power falls

06 Common mistakes and what to say

Mistake	Student writes	Say this
Leaving time deposits out of money	“Time deposits cannot be spent now, so they are not money”	“Money is layered by liquidity; time deposits belong to M2, so count them when M2 is asked.”
Multiplying by the reserve ratio	“The multiplier is 0.20, so deposits are 200”	“The multiplier is one over rrr; a 20 % reserve lets the system expand five times.”
Dividing instead of subtracting for the real rate	“Real rate is 5 % divided by 3 %”	“Subtract, or use Fisher; dividing gives a ratio, not an interest rate.”
Assuming the multiplier always arrives	“Print 100 billion and deposits rise by 500 billion”	“Borrowers and redeposits are required; excess reserves and cash leakage shrink the actual multiplier.”

07 Homework (paper, section and question numbers)

Economics chapter index — Revise inflation and unemployment first, then questions 1 and 2
DSE Economics paper — Do the money and banking section in 12 minutes
Inflation and unemployment — Question 3 compares CPI with the GDP deflator

08 Exit check (last 5 minutes)

Question	Answer	Decision
M1 with cash 200 and demand 800	1,000	Error: time deposits included
M2 after adding 1,500 of time deposits	2,500	Error: layer missed or double counted
Maximum deposits with rrr 20 % and 1,000 initial	5,000	Error: multiplier taken as 0.2
Real rate at 5 % nominal and 3 % inflation	About 2 %	Error: divided rather than subtracted

09 Tutor FAQ

Is a credit card money?

No. It defers payment and creates credit; settlement still comes from a bank deposit, so it is outside M1.

Why is the monetary base so much smaller than the money supply?

Because of deposit creation: the base is reserves plus cash, while the supply is what lending multiplies it into.

Can Hong Kong set interest rates freely under the peg?

Not fully; capital flows move rates and the HKMA adjusts the aggregate balance to hold the 7.75 to 7.85 band.

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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.

Practice papers: Paper 1 (Money and Banking)