Question

Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed?

A. Increased by $2,350
B. Increased by $2,000
C. Decreased by $350
D. Decreased by $1,650

Answer 1

Depositing $350 into a bank account does not change the money supply, while taking out a $2,000 loan increases it. Thus, the money supply has increased by $2,000.

Step-by-step explanation:

When Johnson deposits $350 of currency into his account at XYZ bank, this does not alter the money supply as the cash is simply converted into a demand deposit, thinking in terms of M1 money supply, which includes cash and checking deposits. Depositing $350 into a bank account does not change the money supply, while taking out a $2,000 loan increases it.

Thus, the money supply has increased by $2,000. However, when Swanson takes out a loan for $2,000 at the same bank, this increases the money supply, because the bank is creating new money by crediting Swanson's account with funds. The total change in the money supply is thus an increase of $2,000, the amount of the newly created loan.