Question

Assume that Jones deposits $500 in currency into her checkable deposit account in First National Bank. A half‑hour later Smith obtains a loan for $750 at this bank. By how much and in what direction has the money supply changed? Explain.

Answer 1

Depositing $500 does not change the money supply, but when Smith obtains a $750 loan, the money supply increases by $750 due to the creation of new demand deposits.

Step-by-step explanation:

When Jones deposits $500 in currency into her checking account in First National Bank, the bank's reserves increase by that amount, but the money supply does not change because the currency was already part of the money supply in the form of physical cash. However, when Smith obtains a loan for $750, the money supply increases by that amount. This is because the bank has created new money through lending that did not exist in the form of physical cash or demand deposits before the loan was made. This expansion of money supply is a result of the money multiplier effect in fractional reserve banking, where banks hold only a fraction of their deposits in reserve and loan out the rest, therefore increasing the total amount of checkable deposits within the economy.

Answer 2

money supply increase here $750

Step-by-step explanation:

given data

deposits = $500

loan = $750

time = half hour

to find out

how much and in what direction has the money supply changed

solution

we know that Currency and check able deposits both are the part of money supply

so that Jones deposit money not impact the money supply

and we know when we go for loan , bank open check able deposit account

so we can say new loan made is = $750

Check able deposit is also part of money supply

so money supply increase here $750