When part of the quantity of money is held in currency, then
A) a currency drain occurs.
B) there is a higher level of excess reserves.
C) the money multiplier will increase in value.
D) the Fed will find it beneficial to increase the discount rate.

Question

Quizplus · Accepted Answer

A currency drain refers to the situation where money that could potentially be deposited in banks and contribute to the money supply through the creation of loans is instead held in physical currency by the public. This reduces the base for the money multiplier effect, leading to a smaller increase in the total money supply than if the funds were deposited in banks.

When Part of the Quantity of Money Is Held in Currency