# Interesting Thought Question on Money Creation

Document created by Eric Chiang on Dec 16, 2015
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This is an example that I’ve adapted from an original story posted by Eric Keetch in the Financial Times on August 12, 2009 titled “Quantitative Easing: It’s So Simple!”

Suppose Will gives his wallet containing \$100 to Alex to hold while he works out. During Will’s workout, Alex uses the \$100 to pay his mechanic who fixed his scooter. The mechanic then took this \$100 to his vet to pay off his past due account from services previously provided to his dog. The vet then used the \$100 to pay Alex for money she owed him for tutoring her in economics. Alex then puts the \$100 back into Will’s wallet. After Will’s workout, Alex returns the wallet to Will without him ever realizing that money was temporarily missing.

Although the same \$100 was used without Will’s knowledge, everybody’s debt has been settled. How much money was created out of thin air?

1. \$300
2. \$200
3. \$100
4. \$0

Answer: \$300. Although the same \$100 was used, the money was able to satisfy three separate \$100 transactions. The same outcome would have happened if everyone: Alex, the mechanic, and the vet, each had their own \$100 and used it to settle their debts. Instead, none of the three had any cash, but instead “borrowed” Will’s \$100 and used it three times without him knowing.