IT SAYS IN MY ECONOMICS TEXTBOOK THIS: "NOTICE THE MONEY SUPPLY HAS INCREASED.WHEN JENNY BORROWED 900 AND THE BANK PUT THAT AMOUNT IN HER CHECKING ACCOUNT,NO ONE ELSE IN TH ECONOMY HAD ANY LESS MONEY, AND JENNY HAD MORE THAN BEFORE. CONSEQUENTLY, THE MONEY SUPPLY HAS INCREASED." BUT THIS DOES NOT MAKE SENSE BECAUSE PERSON A HAS LESS MONEY BECAUSE HIS MONEY WAS USED FOR THE LOAN! IS THIS CORRECT?

Expert Answers

| Certified Educator

No, it is not correct. Your book is right.

When the bank loans money out to Jenny, she has money that did not exist before. Presumably your book mentions some other person who deposited probably $1000. We'll call him Chuck. When the bank gave $900 to Jenny, they did not take money out of Chuck's account. He still has $1000 in the bank.

If they took his money and lent it, they would not be creating money. But they did not take his money. They created new money based on his deposit -- secured by his deposit.

If the bank actually took away your money and lent it to someone else, no one would ever put money in the bank because it would be too hard to know when you would be able to get that money out.

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