Suppose that Adam Ricardo deposits $1,000 of cash into the Penguins Bank.On the same day,David Smith negotiates a loan for $4,000.By how much has the money supply changed?

Question

Quizplus · Accepted Answer

The money supply includes both currency in circulation and the total deposits held by the public. In this case, Adam's deposit of $1,000 increases the amount held in deposits, while David's loan of $4,000 creates a new deposit for him. Therefore, the overall increase in deposits is $1,000 (from Adam's deposit) + $4,000 (from David's loan) = $5,000. Therefore, the money supply has increased by $5,000.

Suppose That Adam Ricardo Deposits $1,000 of Cash into the Penguins