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.”
a. How much “money” is there in the Numenor economy before Edith walks into 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?
c. How much “money” is there in the Numenor economy after the Bank makes Max the loan?
d. Which action created money: Edith’s deposit or Max’s loan?