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

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

Monetary base is the sum of money available in the bank vaults, reserves of commercial banks with central bank and the money in circulation with people.Here only money with Edith is given so the monetary base is 100 silver coins/ thalers (currency)

M1 : it includes currency in circulation, demand deposits and other deposits in the bank.

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

monetary base after Edith makes her deposit : 100

M1 : 100 because checking account is included in the M1 and there is no money in circulation given.

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

money in the economy after bank makes Max the loan

monetary base and M1 both will be 150 (Edith’s deposit 100 + Max’s loan 50)