Module 38

Money, Banking & Interest Rates

This high school economics module explains what money really is and how the price of borrowing shapes the economy.

Students analyze payment methods, central banks, inflation, crypto, stocks, bonds, bond prices, nominal and real interest rates, borrower risk, loanable funds, and expected inflation.

Module At A Glance

Grade Levels:

9th - 12th

Est. Length:

1-2 Weeks (38 slides)

Activities:

8 Activities

Articles:

0 Articles

Languages:

English & Spanish

Curriculum Fit:

Math, Business, Economics, CTE, Social Studies

Standards Alignment:

CEE National Standards

Guiding Questions

What is money really, and how do payment methods differ from money?
How do central banks control the money supply?
Why can too much money relative to output lead to inflation?
How do firms and governments use stocks and bonds to raise funds?
Why do bond prices move inversely with market interest rates?
How do nominal rates, inflation, and real interest rates affect savers and borrowers?
Why do riskier loans carry higher interest rates?
What causes interest rates to rise or fall across the economy?

Enduring Understandings

Money is defined by its functions: medium of exchange, store of value, and unit of account; cards and payment apps transfer balances but are not money themselves.
Central banks manage the money supply, and when money grows too quickly relative to output, prices tend to rise over time.
Cryptocurrency can perform some money-like functions, but volatility and limited pricing use make it behave more like a speculative asset than official money.
Companies and governments raise funds by issuing stocks and bonds, and investors accept different risks in exchange for dividends, capital gains, or interest.
Bond prices move inversely to market interest rates because existing fixed payments become more or less attractive as new rates change.
The real interest rate, calculated as the nominal rate minus inflation, shows the true reward for saving and the true cost of borrowing.
Interest rates move with borrower risk, the supply of savings, the demand for funds, and expectations about future inflation.

Module Vocab & Key Topics

Money: Anything widely accepted as a medium of exchange, store of value, and unit of account in an economy.
Medium of Exchange: A function of money that allows people to buy and sell goods and services without relying on barter.
Store of Value: A function of money that lets people hold purchasing power for future use.
Unit of Account: A function of money that provides a common way to measure and compare prices, values, and debts.
Payment Method: A tool such as a debit card, credit card, or payment app that transfers balances to complete a purchase but is not money itself.
Central Bank: The institution responsible for managing a country's money supply and monetary system, such as the Federal Reserve in the United States.
Money Supply: The total amount of money available in an economy at a given time.
Inflation: A general rise in prices that reduces the purchasing power of money over time.
Cryptocurrency: A digital asset that can be transferred electronically but is usually not official money because it is volatile and rarely used as a unit of account.
Speculative Asset: An asset bought mainly because investors hope its price will rise, even though its future value is uncertain.
Stock: A share of ownership in a company that can provide returns through dividends, capital gains, or both.
Dividend: A payment a company makes to shareholders from its profits.
Capital Gain: The profit earned when an asset is sold for more than its purchase price.
Capital Loss: The loss incurred when an asset is sold for less than its purchase price.
Bond: An IOU issued by a company or government that promises interest payments and repayment of the amount borrowed.
Bond Market: The market where investors buy and sell bonds after they are issued.
Interest Rate: The price of borrowing money or the reward paid for lending or saving money, expressed as a percentage.
Nominal Interest Rate: The stated interest rate on a loan, bond, or savings account before adjusting for inflation.
Real Interest Rate: The interest rate after adjusting for inflation, calculated as the nominal interest rate minus the inflation rate.
Default: The failure of a borrower to repay a loan or bond as promised.
Credit Score: A rating used to estimate how likely a borrower is to repay debt, which helps lenders set interest rates.
Supply of Savings: The amount of funds households and other savers make available for borrowers to use.
Demand for Funds: The amount of borrowing desired by households, businesses, and governments at different interest rates.
Expected Inflation: The inflation rate lenders and borrowers anticipate in the future, which can influence nominal interest rates today.

Worked Examples

Money & Rates In Action

Four mechanisms that turn one central-bank rate into the cost of everything.

Figures current · August 2026

Money multiplier

How Banks Multiply a Deposit

multiplier = 1 ÷ reserve ratioreserve ratio = 10%

Banks keep a fraction of every deposit in reserve and lend the rest — say a 10% reserve ratio. Deposit $1,000: the bank lends $900, that $900 is redeposited and lent again, each round 10% smaller. The multiplier is 1 divided by the reserve ratio — 10 — so one $1,000 deposit can support $10,000 across the banking system.

$10,000supported by one $1,000 depositmultiplier = 1 ÷ 0.10 = 10

Each round re-lends the last deposit minus its reserve, so a single $1,000 deposit multiplies into as much as $10,000 of money across the banking system.

Rate transmission

From Fed Funds to Your Loan

loan rate ≈ policy rate + spreadspread = term + risk

The Fed sets one rate — the federal funds target, currently 3.50%–3.75%. Every consumer rate is built on top of it. A 30-year mortgage runs about 6.65%, and a typical credit-card APR is near 24%: the policy rate plus a spread for the loan's term and the borrower's default risk.

6.65%30-year mortgage rate3.75% fed funds + ~2.9 pts

The central bank sets one rate, and every mortgage, card, and loan rate is that policy rate plus a spread — so they all move together when the Fed moves.

Real rate

What Interest Is Worth After Inflation

real rate ≈ nominal − inflationFisher rule

A rate only rewards a saver if it outruns inflation. A top high-yield savings account pays about 4.2%, but consumer prices rose 3.4% over the past year (CPI). Subtract one from the other and the real return — the purchasing power actually gained — is just 0.8%.

0.8%real return today4.2% saver − 3.4% inflation

The real rate is the nominal rate minus inflation, so a 4.2% account earns just 0.8% of real purchasing power while prices climb 3.4%.

Bonds

Prices Move Opposite to Rates

price = coupon ÷ yieldcoupon is fixed

A bond pays a fixed $50 a year; at issue its $1,000 price yields 5%. If market rates rise, no one pays $1,000 for a $50 coupon when newer bonds pay more, so the price falls until that fixed $50 matches the going yield. Price equals coupon over yield — so when the yield doubles to 10%, the price halves to $500.

$500price when the yield doubles to 10%$1,000 at a 5% yield

Because the coupon is fixed, reaching a higher yield means paying a lower price — so when market rates rise, the prices of existing bonds fall.

Sources: federal funds target range 3.50%–3.75%, held at the July 28–29, 2026 FOMC meeting (Federal Reserve); 30-year fixed mortgage 6.65% (Freddie Mac, Aug 20, 2026) and a ~24% average new-card APR (Forbes Advisor); CPI inflation 3.4% (BLS, July 2026) against a ~4.2% high-yield savings rate (NerdWallet); annual average CPI 2022–2025 (BLS). Checked August 24, 2026. Card 1 and Card 4 figures are derived from the inputs shown; the 10% reserve ratio is a textbook illustration.

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Inflation & Monetary Policy