Question

Let’s watch a bank create money. Last Wednesday, the Bank of Numenor opened for business. The first customer, Edith, walked in the door with 100 silver coins called Thalers to deposit in a new checking account. The second customer, Max, walks in the door a few minutes later, asking to borrow 50 Thalers for a week. The bank lends Max the Thalers. Just to keep things simple, assume these are the only financial transactions in Numenor. And just to be clear: Thalers are either “currency” or “reserves”: Silver in Max or Edith’s hands is “currency,” while Thalers in the bank is “reserves.”

. How much “money” is there in the Numenor economy before Edith walks into the bank?

Monetary base:_____Thalers, M1:_____Thalers

How much “money” is there in the Numenor economy after Edith makes her deposit, but before Max walks in for his loan?

Monetary base:_____Thalers, M1:_____Thalers

. How much “money” is there in the Numenor economy after the bank makes Max the loan?

Monetary base:_____Thalers, M1:_____Thalers

Answer 1

Answer:

Monetary base=Currency+Reserves

Money supply=Currency+Deposits.

Before Edith walked into the Bank she was holding 100 silver coins as currency and the monetary base was 100 Thelers, M1=100 Thalers(Both include only currency 100 Thalers).

After Edith makes her deposit, but before Max walks in for his loan Monetary base=100 Thalers(Only reserves) and M1=100 Thalers(Only Deposits)(0 Currency).

After the bank makes Max the loan of 50 Thalers, Monetary base=100 Thalers(50Thalers Currency+50 Thalers reserves) and M1=150 Thalers(50 Thalers Currency +100 Thalers Deposit).

Thalers in the hands of Max are currency, whereas Edith's deposit will remain 100 Thalers that she deposited in the bank.