


 

Pounds of Gold: 80 
 
Promises to Pay Gold: 80 
Loans: 20 
 
Net Worth: 20 
1a. Explain what will happen on the above balance sheet if the goldsmith makes a loan for 20 pounds to John Smyth. (Assume the borrower will take paper money. Paper money is a promise by the goldsmith to pay gold.)
b. What changes will take place in the above balance sheet if a merchant who borrowed 3 from Goldsmith Banker pays off his debt using paper money that the bank issued? Will the amount of money change as a result of this transaction?
c. Start again with the numbers in the original balance sheet above. What changes take place if the merchant pays his debt of 3 by bringing in gold? Will the amount of money change as a result of this transaction?
d. Start again with the original numbers. Explain what will happen in the above balance sheet if a robber steals 10 pounds of gold from the goldsmith. What if he steals 30 pounds?
e. Start again with the original numbers. Explain what will happen if a merchant who has borrowed 5 from the bank defaults on his loan.

