Assume that Jones deposits $500 in currency into her checkable deposit account in First National Bank. A half鈥慼our later Smith obtains a loan for $750 at this bank. By how much and in what direction has the money supply changed? Explain.
No, no, no. The supply of money is not affected by these transactions. The bank is ($250) (negative) in cash flow and Jones is +250 in cash flow, with an open contract for Jones to repay the $750 (plus interest) and the retained right to withdraw the $500 deposited at the bank or write checks against it. |
