LESSON PLAN

CLASS – XIIth
SUBJECT – ECONOMICS (MACROECONOMICS)
CHAPTER – 3 MONEY AND BANKING
TOPIC - 3.1 FUNCTIONS OF MONEY
Learning Objectives
 Recall and list the functions of money.
 Analyze real-life scenarios to understand the application of money's functions.
 Differentiate between the primary and secondary functions of money.
 Design a creative representation (e.g., skit, presentation) showcasing the importance of
money in an economic system
Materials Needed
 Whiteboard or projector
 Markers or pens
 Chart paper (optional)
 Markers (optional)
 Prepared scenarios or case studies illustrating the functions of money
Lesson Outline
Introducing Money: Beyond Notes and Coins (10 minutes)

 Begin by engaging students in a brainstorming session. Ask: 'What comes to mind when
you think of money?'
 Guide the discussion beyond the physical aspect of currency towards its significance in
transactions and economic systems.
Unveiling the Functions of Money (15 minutes)

 Introduce the four primary functions of money: Medium of Exchange, Unit of Account,
Store of Value, and Standard of Deferred Payment.
 Provide clear definitions and relatable examples for each function. For instance:
 **Medium of Exchange:** Facilitates buying and selling, replacing barter system
complexities (e.g., using rupees to buy groceries).
 **Unit of Account:** Provides a common measure of value for goods and services (e.g.,
comparing prices of clothes).
 **Store of Value:** Allows individuals to save purchasing power for future use (e.g.,
depositing money in a bank).
 **Standard of Deferred Payment:** Enables credit transactions and future payments
(e.g., taking a loan).
Analyzing Real-World Applications (10 minutes)
  Divide students into groups and present them with prepared scenarios or case studies.
 Each scenario should illustrate one or more functions of money.
 Encourage group discussions and analysis to identify which function(s) are being
depicted and explain their reasoning.
Creative Expression: Money in Action (10 minutes)

 Allow students to choose a creative format (skit, presentation, poster, etc.) to showcase
their understanding of money's functions.
 Encourage them to incorporate real-life examples, humor, or unique perspectives to
make their presentations engaging and insightful.
Wrap-up and Reflection (5 minutes)

 Conclude the lesson by summarizing the key functions of money and their significance in
an economy.
 Encourage students to reflect on how money impacts their daily lives and the broader
financial system.
Assessment
 Observe students' participation and contributions during brainstorming and group
discussions.
 Evaluate their understanding and analysis of scenarios illustrating money's functions.
 Assess the creativity and accuracy of their presentations showcasing the importance of
money.
Applications
Personal Finance

 Making informed financial decisions like budgeting, saving, and investing by

understanding the functions of money.
 Example: 'Saving a portion of earnings in a bank account utilizes money's function as a
store of value.'
Economic Analysis

 Analyzing economic phenomena like inflation, deflation, and monetary policy by

understanding the role of money in an economy.
 Example: 'Inflation erodes the purchasing power of money, impacting its function as a
store of value.'
Teaching Strategies
Interactive Discussion

Encourage active participation by asking open-ended questions, prompting students to share

their thoughts and experiences related to money.
Real-World Connections

Use relatable examples and case studies to bridge the gap between theoretical concepts and
practical applications of money's functions.

Collaborative Learning

Facilitate group activities and discussions to encourage peer learning, idea sharing, and
collaborative problem-solving.

Success Metrics
 Can the student list and define the four primary functions of money?
 Can the student accurately identify and explain the functions of money demonstrated in
real-life scenarios?
 Can the student creatively represent their understanding of money's importance in an
economic system?
Follow Up
In the next lesson, we will delve deeper into the concept of money supply, exploring its
components (M1, M2, etc.) and understanding how central banks manage the money supply to
influence economic activity. We will also discuss the evolution of money from barter systems to
modern forms of currency.

Handout 1: Functions of money in an economy

Definitions/Theory Explanations
Introduction to Money

Money is more than just notes and coins. It plays a crucial role in transactions and economic
systems. It is a medium that facilitates trade and helps in the smooth functioning of an
economy.

Primary Functions of Money

1. **Medium of Exchange:** Money facilitates buying and selling, replacing the complexities of
the barter system. For example, using rupees to buy groceries.
2. **Unit of Account:** Money provides a common measure of value for goods and services,
making it easier to compare prices. For example, comparing the prices of different clothes.
3. **Store of Value:** Money allows individuals to save purchasing power for future use. For
example, depositing money in a bank.
4. **Standard of Deferred Payment:** Money enables credit transactions and future payments.
For example, taking a loan.
Secondary Functions of Money

1. **Transfer of Value:** Money can be transferred from one person to another, facilitating
trade and investment.
2. **Liquidity:** Money is the most liquid asset, meaning it can be easily converted into other
forms of value without losing its worth.

Key Concepts and Their Explanation

Medium of Exchange

Money is used to facilitate transactions. It eliminates the need for a double coincidence of
wants, which is a major drawback of the barter system.

Unit of Account

Money provides a standard measure of value, making it easier to compare the worth of
different goods and services.

Store of Value

Money can be saved and retrieved in the future, retaining its value over time. This function is
crucial for saving and investment.

Standard of Deferred Payment

Money allows for the settlement of debts and future payments, facilitating credit transactions
and economic planning.

Practice Problems
Problem 1

List the four primary functions of money and provide a real-life example for each.

Problem 2

Analyze the following scenario: A farmer sells his produce at the market and deposits the
money in a bank. Which functions of money are being demonstrated here?

Problem 3

Differentiate between the primary and secondary functions of money with examples.

Problem 4
Create a skit or presentation showcasing the importance of money in an economic system.
Include examples of its functions.

Problem 5

Discuss how inflation can impact the store of value function of money.

Additional Notes
 Remember to bring your markers and chart paper for the creative expression activity.
 Reflect on how money impacts your daily life and the broader financial system.

Narration 1: Functions of money in an economy

Introducing Money: Beyond Notes and Coins (00:10:00)
 Good morning, Class XII! Today, we are going to explore the fascinating world of money
and its functions. To start, let's brainstorm together. What comes to mind when you
think of money?
 Feel free to shout out your answers! Yes, I hear 'notes,' 'coins,' 'buying things,' and
'savings.' Great! Now, let's think beyond the physical aspect of money. Why is money
important in our daily transactions and the overall economic system?
 Money is not just about the notes and coins we use. It plays a crucial role in facilitating
transactions, measuring value, storing wealth, and enabling future payments. By the end
of this lesson, you'll understand these functions in detail.
Unveiling the Functions of Money (00:15:00)
 Now, let's dive into the four primary functions of money. These are: Medium of
Exchange, Unit of Account, Store of Value, and Standard of Deferred Payment.
 First, Medium of Exchange. Money facilitates buying and selling, replacing the
complexities of the barter system. For example, you use rupees to buy groceries instead
of bartering goods.
 Second, Unit of Account. Money provides a common measure of value for goods and
services. For instance, you can compare the prices of different clothes because they are
all measured in rupees.
 Third, Store of Value. Money allows individuals to save purchasing power for future use.
Think about depositing money in a bank; it retains its value over time.
 Lastly, Standard of Deferred Payment. Money enables credit transactions and future
payments. For example, when you take a loan, you agree to pay back the money in the
future.
 Can anyone give me an example of how you use money in your daily life that fits one of
these functions?
Analyzing Real-World Applications (00:10:00)
 Now, let's get into groups. Each group will receive a scenario or case study illustrating
one or more functions of money.
 Discuss within your group and identify which function or functions of money are being
depicted. Be ready to explain your reasoning to the class.
 For example, if the scenario is about someone saving money in a bank, which function is
that? Yes, Store of Value! Excellent. Let's get started with your group discussions.
Creative Expression: Money in Action (00:10:00)
 Now that we've discussed the functions of money, it's time for some creative
expression!
 You can choose to create a skit, presentation, or poster to showcase your understanding
of money's functions. Feel free to incorporate real-life examples, humor, or unique
perspectives to make your presentations engaging and insightful.
 You have 10 minutes to prepare. Remember, the goal is to creatively represent the
importance of money in our economic system. Let's see your creativity in action!
Wrap-up and Reflection (00:05:00)
 Let's wrap up today's lesson by summarizing the key functions of money. We discussed
how money acts as a Medium of Exchange, Unit of Account, Store of Value, and
Standard of Deferred Payment.
 Reflect on how money impacts your daily lives and the broader financial system. Think
about the various ways you use money and how it facilitates economic activities.
 In our next lesson, we will delve deeper into the concept of money supply, exploring its
components and understanding how central banks manage the money supply to
influence economic activity. Great job today, everyone!
 LESSON PLAN
CLASS – XIIth
SUBJECT – ECONOMICS (MACROECONOMICS)
CHAPTER – 3 MONEY AND BANKING
TOPIC - 3.2 DEMAND FOR MONEY AND SUPPLY OF MONEY
Learning Objectives
 Define the concept of money demand and its determinants.
 Differentiate between the Transaction, Precautionary, and Speculative motives for
holding money.
 Understand the role of the central bank in controlling the money supply.
 Analyze the impact of changes in money demand and supply on the economy.
Materials Needed
 Whiteboard or projector
 Markers or pens
 Prepared graphs and charts illustrating money demand and supply
 Handouts with real-life examples and case studies
 Economics textbooks (refer to the 2024-2025 CBSE curriculum)
Lesson Outline
Introduction (5 minutes)

 Begin by recapping the concept of money and its functions.

 Introduce the topic of money demand and supply as crucial aspects of macroeconomics.
 Briefly state the learning objectives for the session.
Understanding Money Demand (15 minutes)

 Define money demand as the desire to hold financial assets in the form of money.
 Explain the three motives for holding money: Transaction Motive (for daily
transactions), Precautionary Motive (for unforeseen events), and Speculative Motive
(for potential investment opportunities).
 Illustrate each motive with relatable examples.
 Discuss factors influencing money demand, such as income levels, interest rates, and
price levels.
Money Supply and the Central Bank (15 minutes)

 Define money supply and explain its components (refer to the specific definitions in the
2024-2025 CBSE curriculum).
 Introduce the central bank as the monetary authority responsible for managing the
money supply.
  Discuss the tools used by the central bank to control money supply, such as open
market operations, reserve requirements, and the repo rate.
Interactive Activity: Case Study Analysis (10 minutes)

 Divide students into groups and provide them with a real-life case study involving
changes in money demand or supply.
 Ask each group to analyze the case study and discuss its impact on economic variables
like interest rates, inflation, and GDP.
 Encourage creative solutions and critical thinking.
Conclusion and Assessment (5 minutes)

 Summarize the key concepts covered in the lesson.

 Assess student understanding through a quick oral quiz or a short writing activity based
on the case study analysis.
 Assign homework requiring students to research and present real-world examples of
monetary policy changes and their effects.
Assessment
 Active participation in class discussions and group activities.
 Understanding and application of concepts during the case study analysis.
 Completion and quality of homework assignments.
Applications
Monetary Policy Analysis

 Understanding how changes in money supply can be used to influence economic

growth, inflation, and unemployment.
 Example: 'Analyzing the impact of a decrease in the repo rate on borrowing costs and
investment.'
Personal Finance

 Making informed decisions about savings, investments, and borrowing based on an

understanding of interest rates and inflation.
 Example: 'Understanding how inflation affects the real value of savings and
investments.'
Teaching Strategies
Interactive Discussions

Encourage student participation by asking open-ended questions and fostering debates on

economic concepts.

Visual Aids
Use graphs, charts, and multimedia presentations to illustrate complex economic theories and
make them more engaging.

Real-World Applications

Connect theoretical concepts to real-life examples and current events to enhance student
understanding and relevance.

Success Metrics
 Can the student define and explain the concepts of money demand and supply?
 Can the student identify and analyze the factors influencing money demand and supply?
 Can the student explain the role of the central bank in managing the money supply and
its impact on the economy?
Follow Up
In the next lesson, we will delve deeper into the concept of the money market, exploring the
equilibrium between money demand and supply. We will also discuss the relationship between
the money market and the goods market, leading to a more comprehensive understanding of
macroeconomic equilibrium.
 Handout 1: Demand and supply of money
Definitions/Theory Explanations
Money Demand

Money demand refers to the desire to hold financial assets in the form of money. It is
influenced by various factors such as income levels, interest rates, and price levels.

Motives for Holding Money

There are three primary motives for holding money:

1. Transaction Motive: Holding money for daily transactions.
2. Precautionary Motive: Holding money for unforeseen events.
3. Speculative Motive: Holding money for potential investment opportunities.

Money Supply

Money supply is the total amount of monetary assets available in an economy at a specific
time. It includes various components such as currency in circulation and demand deposits.

Role of the Central Bank

The central bank is the monetary authority responsible for managing the money supply. It uses
tools like open market operations, reserve requirements, and the repo rate to control the
money supply.

Key Concepts and Their Explanation

Factors Influencing Money Demand

Income Levels: Higher income levels increase the demand for money.
Interest Rates: Higher interest rates decrease the demand for money as people prefer to invest.
Price Levels: Higher price levels increase the demand for money as more money is needed for
transactions.

Tools Used by the Central Bank

Open Market Operations: Buying and selling government securities to control the money
supply.
Reserve Requirements: Setting the minimum reserves each bank must hold to back its deposits.
Repo Rate: The rate at which the central bank lends money to commercial banks.

Practice Problems
Problem 1

Define money demand and list its determinants.

Problem 2

Differentiate between the Transaction, Precautionary, and Speculative motives for holding
money with examples.

Problem 3

Explain the role of the central bank in controlling the money supply.

Problem 4

Analyze the impact of an increase in interest rates on money demand.

Problem 5

Discuss how open market operations can be used to control inflation.

Additional Notes
 Remember to review the prepared graphs and charts illustrating money demand and
supply.
 Refer to the 2024-2025 CBSE curriculum for specific definitions and explanations.
 Engage actively in class discussions and group activities to enhance your understanding.
 Narration 1: Demand and supply of money
Introduction (00:05:00)
 Good morning, everyone! Today, we are going to explore a very important topic in
macroeconomics: the demand for money and the supply of money.
 To start, let's quickly recap what we know about money. Can anyone tell me what
money is and its primary functions?
 Great! Money serves as a medium of exchange, a unit of account, and a store of value.
 Now, let's dive into today's topic. We will discuss the demand for money, the supply of
money, and how these concepts are crucial in understanding the economy.
 By the end of this lesson, you should be able to define the concept of money demand
and its determinants, differentiate between the motives for holding money, understand
the role of the central bank in controlling the money supply, and analyze the impact of
changes in money demand and supply on the economy.
Understanding Money Demand (00:15:00)
 Let's begin with the demand for money. Money demand refers to the desire to hold
financial assets in the form of money rather than other forms of assets.
 There are three primary motives for holding money: the Transaction Motive, the
Precautionary Motive, and the Speculative Motive.
 The Transaction Motive is the need to hold money for daily transactions. For example,
you need cash to buy groceries or pay for transportation.
 The Precautionary Motive is the need to hold money for unforeseen events, such as
medical emergencies or unexpected repairs. Can anyone share an example of a situation
where you might need money unexpectedly?
 The Speculative Motive is the desire to hold money to take advantage of future
investment opportunities. For instance, if you expect the stock market to drop, you
might hold onto cash to buy stocks at a lower price later.
 Now, let's discuss the factors that influence money demand. These include income
levels, interest rates, and price levels.
 Higher income levels generally increase the demand for money because people have
more transactions to make.
 Interest rates also play a crucial role. When interest rates are high, people prefer to
invest their money rather than hold it as cash.
 Lastly, price levels affect money demand. Higher prices mean people need more money
to buy the same goods and services.
Money Supply and the Central Bank (00:15:00)
 Next, let's talk about the money supply. Money supply refers to the total amount of
money available in an economy at a particular time.
 The money supply includes various components such as currency in circulation and
demand deposits.
  The central bank, which in India is the Reserve Bank of India (RBI), is responsible for
managing the money supply.
 The central bank uses several tools to control the money supply. One of these tools is
open market operations, where the central bank buys or sells government securities to
influence the amount of money in the banking system.
 Another tool is the reserve requirement, which is the percentage of deposits that banks
must hold in reserve and not lend out.
 The repo rate is also a significant tool. It is the rate at which the central bank lends
money to commercial banks. By changing the repo rate, the central bank can influence
borrowing and lending in the economy.
 For example, if the RBI lowers the repo rate, it becomes cheaper for banks to borrow
money, which can lead to an increase in lending and, consequently, an increase in the
money supply.
Interactive Activity: Case Study Analysis (00:10:00)
 Now, let's move on to an interactive activity. I will divide you into groups and provide
each group with a real-life case study involving changes in money demand or supply.
 Your task is to analyze the case study and discuss its impact on economic variables like
interest rates, inflation, and GDP.
 For example, consider a scenario where the central bank increases the money supply.
What do you think will happen to interest rates and inflation?
 Take about 5 minutes to discuss within your groups, and then we will share our findings
with the class.
 Remember to think critically and come up with creative solutions. This activity will help
you apply the concepts we've learned to real-world situations.
Conclusion and Assessment (00:05:00)
 Let's wrap up today's lesson by summarizing the key concepts we've covered.
 We discussed the demand for money and its three motives: Transaction, Precautionary,
and Speculative.
 We also explored the money supply and the role of the central bank in managing it.
 To assess your understanding, let's have a quick oral quiz. Can anyone explain the
Transaction Motive for holding money?
 Great! Now, can someone tell me one tool the central bank uses to control the money
supply?
 Excellent! For homework, I want you to research and present real-world examples of
monetary policy changes and their effects on the economy.
 In our next lesson, we will delve deeper into the concept of the money market and
explore the equilibrium between money demand and supply. We will also discuss the
relationship between the money market and the goods market, leading to a more
comprehensive understanding of macroeconomic equilibrium.
 LESSON PLAN
CLASS – XIIth
SUBJECT – ECONOMICS (MACROECONOMICS)
CHAPTER – 3 MONEY AND BANKING
TOPIC ‐ 3.3 MONEY CREATION BY BANKING SYSTEM
Learning Objectives
 Understand the concept of a bank's balance sheet.
 Describe the process of money creation through credit.
 Analyze the factors limiting credit creation and the money multiplier effect.
Materials Needed
 Whiteboard or projector
 Markers or pens
 Prepared slides or charts illustrating balance sheets and money creation process
 Handouts with balance sheet examples and practice problems
 Calculators (optional)
Lesson Outline
Introduction (5 minutes)

 Begin by asking students to recall the functions of money and the role of banks in an
economy.
 Introduce the topic of money creation as a key function of commercial banks.
 Briefly explain the concept of a balance sheet and its components (assets and liabilities).
Balance Sheet of a Fictional Bank (15 minutes)

 Present a simplified balance sheet of a fictional bank, highlighting key asset and liability
items like deposits, loans, reserves, and capital.
 Explain how deposits create a liability for the bank and how loans are considered assets.
 Illustrate how a new deposit can lead to a chain of loan creations using a step‐by‐step
approach.
 Emphasize that banks lend out a portion of their deposits, keeping a fraction as reserves.
Money Creation Process (15 minutes)

 Introduce the concept of the money multiplier, which amplifies the initial deposit into a
larger increase in the money supply.
 Explain the formula for the money multiplier (1/Reserve Ratio) and its relationship with
the reserve requirement.
 Work through a numerical example to demonstrate how multiple rounds of lending and
deposit creation lead to a multiplied increase in the money supply.
  Use graphs or charts to visually represent the money creation process.
Limits to Credit Creation (10 minutes)

 Discuss the factors that limit the amount of credit banks can create, such as:
 Reserve requirements set by the central bank.
 The willingness of borrowers to take loans.
 The availability of creditworthy borrowers.
 Public's desire to hold cash.
 Explain how these factors influence the money multiplier and the overall impact on the
money supply.
Activity and Assessment (5 minutes)

 Divide students into small groups and provide them with handouts containing balance
sheet scenarios and questions related to money creation.
 Ask them to analyze the scenarios, calculate changes in money supply, and discuss the
limiting factors involved.
 This activity will allow students to apply their understanding of the concepts learned
and develop analytical skills.
Assessment
 Observe students' participation in class discussions and their responses to questions.
 Assess their understanding through the group activity and their ability to explain the
money creation process.
 Review the completed handouts for accuracy in calculations and analysis of limiting
factors.
Applications
Monetary Policy

 Understanding how central banks use reserve requirements and other tools to influence
the money supply and control inflation.
 Example: 'The Reserve Bank of India can increase reserve requirements to curb inflation
by limiting the amount of money banks can lend.'
Economic Growth

 Analyzing the role of credit creation in stimulating economic activity by providing funds
for investment and consumption.
 Example: 'Increased credit availability can boost business investment, leading to
economic growth and job creation.'
Teaching Strategies
Interactive Discussion

Encourage students to ask questions, share their understanding, and engage in discussions
throughout the lesson.
Visual Aids

Use diagrams, charts, and graphs to illustrate the concepts of balance sheets, money creation,
and the money multiplier effect.

Real‐World Examples

Connect the theoretical concepts to real‐world scenarios by discussing current events related to
banking, interest rates, and monetary policy in India.

Problem‐Solving Activities

Engage students in problem‐solving activities and calculations to reinforce their understanding

of the money creation process and its limitations.

Success Metrics
 Can the student explain the concept of a bank's balance sheet and its key components?
 Can the student describe the process of money creation through credit and calculate the
money multiplier?
 Can the student analyze the factors that limit credit creation and their impact on the
money supply?
Follow Up
In the next lesson, we will explore the role of the central bank in controlling the money supply
and its impact on inflation and economic growth. We will also discuss different monetary policy
tools and their effectiveness in achieving macroeconomic stability.

Handout 1: Money creation by the banking system

Definitions/Theory Explanations
Bank's Balance Sheet

A bank's balance sheet is a financial statement that lists its assets, liabilities, and capital. Assets
include loans given out by the bank, reserves, and other investments. Liabilities consist of
deposits made by customers and other borrowings. The balance sheet helps in understanding
the financial health and operations of a bank.

Money Creation Process

Money creation refers to the process by which the banking system increases the money supply
in an economy. When a bank receives a deposit, it keeps a fraction as reserves and lends out
the rest. This loan becomes a deposit in another bank, which again keeps a fraction as reserves
and lends out the rest. This cycle continues, leading to a multiplied increase in the total money
supply. The money multiplier is calculated as 1 divided by the reserve ratio.

Limits to Credit Creation

Several factors limit the amount of credit banks can create, including reserve requirements set
by the central bank, the willingness of borrowers to take loans, the availability of creditworthy
borrowers, and the public's desire to hold cash. These factors influence the money multiplier
and the overall impact on the money supply.

Key Concepts and Their Explanation

Assets and Liabilities

Assets are resources owned by the bank that have economic value, such as loans and reserves.
Liabilities are obligations the bank owes to others, such as customer deposits. Understanding
these components is crucial for analyzing a bank's balance sheet.

Reserve Ratio

The reserve ratio is the fraction of deposits that a bank is required to keep as reserves. It is set
by the central bank and plays a critical role in determining the money multiplier. A lower
reserve ratio means a higher money multiplier and vice versa.

Money Multiplier

The money multiplier effect describes how an initial deposit can lead to a larger increase in the
total money supply. It is calculated using the formula 1/Reserve Ratio. For example, if the
reserve ratio is 10%, the money multiplier is 10.
Practice Problems
Problem 1

A bank receives a deposit of ₹10,000. If the reserve ratio is 10%, calculate the total increase in
the money supply.

Problem 2

Explain how a new deposit of ₹5,000 can lead to a chain of loan creations. Use a reserve ratio of
20% in your explanation.

Problem 3

List and explain three factors that can limit the amount of credit a bank can create.

Problem 4

If the reserve ratio is increased from 10% to 20%, what will be the new money multiplier? How
does this change affect the money supply?

Problem 5

A bank has total deposits of ₹50,000 and reserves of ₹5,000. Calculate the reserve ratio and the
money multiplier.

Additional Notes
In the next lesson, we will explore the role of the central bank in controlling the money supply
and its impact on inflation and economic growth. We will also discuss different monetary policy
tools and their effectiveness in achieving macroeconomic stability.

Narration 1: Money creation by the banking system

Introduction (00:05:00)
 Good morning, everyone! Today, we are going to dive into an important aspect of our
economy: money creation by the banking system.
 To start, can anyone recall the primary functions of money and the role of banks in our
economy? Yes, money serves as a medium of exchange, a store of value, and a unit of
account. Banks, on the other hand, play a crucial role in facilitating these functions by
accepting deposits and providing loans.
 Now, let's introduce the topic of money creation. One of the key functions of
commercial banks is to create money through the process of credit creation.
 Before we delve deeper, let's briefly discuss what a balance sheet is. A balance sheet is a
financial statement that shows the assets and liabilities of an entity. For a bank, assets
include loans and reserves, while liabilities include deposits and capital.
Balance Sheet of a Fictional Bank (00:15:00)
 Let's look at a simplified balance sheet of a fictional bank. On the left side, we have the
bank's assets, which include loans and reserves. On the right side, we have the bank's
liabilities, which include deposits and capital.
 For example, if a customer deposits ₹10,000 into the bank, this amount becomes a
liability for the bank because it owes this money to the customer. At the same time, the
bank can use a portion of this deposit to create loans, which are considered assets.
 Let's illustrate this with a step‐by‐step approach. Suppose the bank keeps 10% of the
deposit as reserves (₹1,000) and lends out the remaining ₹9,000. The borrower then
deposits this ₹9,000 into another bank, which again keeps 10% as reserves (₹900) and
lends out ₹8,100. This process continues, creating a chain of loan creations.
 It's important to note that banks do not lend out the entire amount of deposits. They
are required to keep a fraction of the deposits as reserves, which is known as the
reserve requirement.
Money Creation Process (00:15:00)
 Now, let's introduce the concept of the money multiplier. The money multiplier
amplifies the initial deposit into a larger increase in the money supply.
 The formula for the money multiplier is 1 divided by the reserve ratio. For example, if
the reserve ratio is 10%, the money multiplier is 1/0.10, which equals 10. This means
that an initial deposit of ₹10,000 can potentially increase the money supply by ₹100,000.
 Let's work through a numerical example. If the initial deposit is ₹10,000 and the reserve
ratio is 10%, the first bank keeps ₹1,000 as reserves and lends out ₹9,000. The second
bank keeps ₹900 as reserves and lends out ₹8,100, and so on. After multiple rounds of
lending and deposit creation, the total increase in the money supply is ₹100,000.
 To help visualize this process, let's use graphs and charts. Here, you can see how the
initial deposit leads to multiple rounds of lending and deposit creation, resulting in a
multiplied increase in the money supply.
Limits to Credit Creation (00:10:00)
  While the money creation process can significantly increase the money supply, there are
factors that limit the amount of credit banks can create.
 One of the main factors is the reserve requirement set by the central bank. Higher
reserve requirements mean that banks must keep a larger portion of deposits as
reserves, reducing the amount available for lending.
 Another factor is the willingness of borrowers to take loans. If borrowers are not willing
to take loans, the money creation process is limited.
 The availability of creditworthy borrowers also plays a role. Banks are more likely to
lend to borrowers who are likely to repay their loans.
 Lastly, the public's desire to hold cash can limit credit creation. If people prefer to hold
cash rather than deposit it in banks, the amount of money available for lending
decreases.
 These factors influence the money multiplier and the overall impact on the money
supply.
Activity and Assessment (00:05:00)
 Now, let's put our understanding to the test with a group activity.
 I'll divide you into small groups and provide each group with handouts containing
balance sheet scenarios and questions related to money creation.
 Your task is to analyze the scenarios, calculate changes in the money supply, and discuss
the limiting factors involved.
 This activity will help you apply the concepts we've learned and develop your analytical
skills.
 I'll be walking around to assist and observe your discussions. Let's get started!
 LESSON PLAN
CLASS – XIIth
SUBJECT – ECONOMICS (MACROECONOMICS)
CHAPTER – 3 MONEY AND BANKING
TOPIC - 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY
Learning Objectives
• Recall and define the key tools used by the central bank to control money supply.
• Understand the mechanisms through which each tool impacts the money supply.
• Analyze the potential effects of each monetary policy tool on economic variables like
inflation and output.
• Creatively apply the understanding of these tools to hypothetical economic scenarios
and suggest suitable policy responses.
Materials Needed
• Whiteboard or projector
• Markers or pens
• Prepared presentation slides (optional)
• Handouts with economic scenarios (for application activity)
• Chart paper (for group activity)
Lesson Outline
Introduction & Recap (10 minutes)

• Begin by briefly reviewing the concept of money supply and its significance in the
macroeconomy.
• Prompt a quick recap of previous learning by asking students to define money and its
functions.
• Introduce the concept of monetary policy and its role in influencing the money supply.
Unveiling the Policy Tools (15 minutes)

• Introduce the key monetary policy tools: Open Market Operations, Bank Rate, Reserve
Ratio, and Margin Requirements.
• Explain each tool's mechanism in detail, using clear diagrams and real-world examples
from the Indian economy.
• For instance, illustrate how the RBI buying bonds injects money into the economy (Open
Market Operations).
• Similarly, explain how changes in the repo rate affect borrowing costs and thus, money
supply (Bank Rate).
Analyzing the Impacts (10 minutes)
 • Divide the class into groups and assign each group one monetary policy tool.
• Task each group to analyze and discuss the potential effects of their assigned tool on: -
Money supply - Interest rates - Inflation - Economic growth
• Encourage groups to present their analysis to the class, fostering peer learning.
Application & Creative Thinking (10 minutes)

• Present hypothetical economic scenarios to the class, such as a sudden surge in inflation
or a recessionary phase.
• Encourage students to apply their understanding of monetary policy tools to suggest
appropriate responses.
• For example, ask: 'What policy tool and action would be suitable to combat high
inflation and why?'
• Facilitate a discussion around their suggestions, emphasizing the rationale and potential
trade-offs.
Wrap-up & Consolidation (5 minutes)

• Summarize the key takeaways of the lesson, emphasizing the importance of monetary
policy in ensuring economic stability.
• Address any remaining questions and provide clarification on challenging concepts.
• Assign a brief homework task, such as researching recent monetary policy actions by the
RBI and their rationale.
Assessment
• Active participation in class discussions and group activities.
• Comprehension of the tools and their mechanisms as demonstrated in explanations.
• Critical analysis of the impacts of each tool on economic variables.
• Creativity and justification in applying the tools to hypothetical scenarios.
Applications
Real-world Economics

• Understanding how the RBI uses these tools to manage inflation and promote economic
growth in India.
• Example: 'Analyzing the recent repo rate hike by the RBI in the context of controlling
inflationary pressures.'
Financial Literacy

• Comprehending how changes in monetary policy can impact personal finances, such as
loan interest rates.
• Example: 'Understanding how a decrease in the reserve ratio might lead to lower
interest rates on home loans.'
Teaching Strategies
Visual Aids
Use diagrams, charts, and graphs to illustrate the mechanisms of each monetary policy tool.

Real-world Examples

Connect the concepts to current events and recent actions taken by the Reserve Bank of India.

Interactive Discussions

Encourage student participation through questions, debates, and group activities to foster
deeper understanding.

Success Metrics
• Can the student accurately define and explain the four key monetary policy tools?
• Can the student analyze the impact of each tool on money supply, interest rates,
inflation, and economic growth?
• Can the student apply their understanding to suggest suitable policy responses for
hypothetical economic scenarios?
Follow Up
In the next lesson, we will delve deeper into the complexities of monetary policy transmission
mechanisms. We will explore how changes in policy rates influence market interest rates,
lending activities, aggregate demand, and ultimately, inflation and output. We will also discuss
the limitations and challenges associated with monetary policy implementation in a dynamic
economy like India.
 Handout 1: Controlling money supply: exploring monetary
policy tools
Definitions/Theory Explanations
Monetary Policy

Monetary policy refers to the actions undertaken by a nation's central bank to control the
money supply and achieve macroeconomic goals such as controlling inflation, consumption,
growth, and liquidity.

Open Market Operations (OMO)

Open Market Operations involve the buying and selling of government securities in the open
market to regulate the money supply. For example, when the RBI buys securities, it injects
money into the economy, increasing the money supply.

Bank Rate

The bank rate is the rate at which the central bank lends money to commercial banks. Changes
in the bank rate influence borrowing costs and, consequently, the money supply. For instance, a
lower bank rate reduces borrowing costs, encouraging banks to lend more.

Reserve Ratio

The reserve ratio is the fraction of deposits that banks must hold in reserve and not lend out. A
lower reserve ratio increases the amount of money banks can lend, thereby increasing the
money supply.

Margin Requirements

Margin requirements refer to the minimum amount that must be deposited when borrowing to
buy securities. Adjusting margin requirements can influence the amount of credit available in
the economy.

Key Concepts and their Explanation

Impact on Money Supply

Each monetary policy tool affects the money supply differently. For example, OMOs directly
alter the amount of money in circulation, while changes in the bank rate influence borrowing
and lending behaviors.

Impact on Interest Rates

Monetary policy tools can raise or lower interest rates. For instance, increasing the bank rate
typically raises interest rates, making borrowing more expensive and reducing the money
supply.

Impact on Inflation

By controlling the money supply, monetary policy tools can help manage inflation. For example,
reducing the money supply can help lower inflation by decreasing spending and demand.

Impact on Economic Growth

Monetary policy tools can stimulate or slow down economic growth. For instance, lowering the
reserve ratio can boost economic growth by increasing the availability of credit.

Practice Problems
Problem 1

Explain how the Reserve Bank of India (RBI) can use Open Market Operations to combat high
inflation.

Problem 2

Analyze the potential effects of a decrease in the bank rate on the economy. Consider its
impact on money supply, interest rates, inflation, and economic growth.

Problem 3

Given a scenario where the economy is facing a recession, suggest which monetary policy tool
would be most effective and justify your choice.

Problem 4

Describe how changes in the reserve ratio can influence the money supply and provide a real-
world example from the Indian economy.

Problem 5

Discuss the role of margin requirements in controlling the money supply and how it can be used
to stabilize the economy.

Additional Notes
• Remember to review recent monetary policy actions by the RBI and their rationale as
part of your homework.
• In the next lesson, we will explore the complexities of monetary policy transmission
mechanisms and their impact on the economy.
 Narration 1: Controlling money supply: exploring monetary
policy tools
Introduction & Recap (10 minutes)
• Good morning, everyone! Today, we are going to dive into an important topic in
macroeconomics: the policy tools used by the central bank to control the money supply.
• Let's start with a quick recap. Can anyone tell me what money supply is and why it is
significant in the macroeconomy?
• Great! Money supply refers to the total amount of money available in an economy at a
particular point in time. It is crucial because it influences inflation, interest rates, and
overall economic growth.
• Now, who can remind us of the functions of money?
• Excellent! Money serves as a medium of exchange, a unit of account, a store of value,
and sometimes, a standard of deferred payment.
• Today, we will explore how the central bank, specifically the Reserve Bank of India (RBI),
uses monetary policy to influence the money supply. Monetary policy involves the use
of various tools to control the amount of money circulating in the economy.
Unveiling the Policy Tools (15 minutes)
• Let's move on to the key monetary policy tools used by the RBI: Open Market
Operations, Bank Rate, Reserve Ratio, and Margin Requirements.
• First, Open Market Operations (OMOs). This involves the buying and selling of
government securities in the open market. When the RBI buys securities, it injects
money into the economy, increasing the money supply. Conversely, selling securities
withdraws money from the economy, reducing the money supply.
• For example, if the RBI buys bonds worth ₹10,000 crore, it adds that amount to the
banking system, increasing the money supply.
• Next, the Bank Rate. This is the rate at which the central bank lends money to
commercial banks. A lower bank rate makes borrowing cheaper for banks, encouraging
them to lend more, thus increasing the money supply. A higher bank rate has the
opposite effect.
• Imagine the RBI reduces the repo rate from 6% to 5%. This reduction lowers the cost of
borrowing for banks, leading to an increase in loans and, consequently, the money
supply.
• The Reserve Ratio includes the Cash Reserve Ratio (CRR) and the Statutory Liquidity
Ratio (SLR). CRR is the percentage of a bank's total deposits that must be kept in reserve
with the RBI. SLR is the percentage of deposits that banks must maintain in the form of
liquid assets. Increasing these ratios reduces the money available for lending, thus
decreasing the money supply.
• For instance, if the CRR is increased from 4% to 5%, banks have less money to lend,
reducing the money supply.
 • Lastly, Margin Requirements. This refers to the minimum amount that must be paid
upfront when borrowing to buy securities. Higher margin requirements mean borrowers
need more of their own money, reducing the amount they can borrow, and thus, the
money supply.
• For example, if the margin requirement is increased from 10% to 20%, borrowers need
to pay more upfront, reducing their borrowing capacity and the money supply.
Analyzing the Impacts (10 minutes)
• Now, let's analyze the impacts of these tools. We'll divide into groups, and each group
will focus on one monetary policy tool.
• Group 1, you'll analyze Open Market Operations. Group 2, you'll focus on the Bank Rate.
Group 3, you'll take the Reserve Ratio. Group 4, you'll work on Margin Requirements.
• Discuss the potential effects of your assigned tool on the money supply, interest rates,
inflation, and economic growth.
• After your discussion, each group will present their analysis to the class. This will help us
understand the broader implications of these tools.
Application & Creative Thinking (10 minutes)
• Let's apply our understanding to some hypothetical economic scenarios.
• Scenario 1: There's a sudden surge in inflation. What policy tool and action would be
suitable to combat high inflation and why?
• Scenario 2: The economy is in a recessionary phase. What policy tool and action would
be appropriate to stimulate economic growth and why?
• Discuss your suggestions and the rationale behind them. Remember, each tool has its
trade-offs and potential side effects.
• Let's hear your thoughts and engage in a discussion around your suggestions.
Wrap-up & Consolidation (5 minutes)
• To wrap up, let's summarize the key takeaways from today's lesson.
• We learned about the importance of monetary policy in controlling the money supply
and ensuring economic stability.
• We explored the mechanisms and impacts of key policy tools: Open Market Operations,
Bank Rate, Reserve Ratio, and Margin Requirements.
• Does anyone have any remaining questions or need clarification on any concepts?
• For homework, please research recent monetary policy actions by the RBI and their
rationale. This will help reinforce today's learning and provide real-world context.
• Great job today, everyone! See you in the next class where we will delve deeper into the
complexities of monetary policy transmission mechanisms.