When the Fed decreases reserve requirements, if the ratio of currency to deposits decreases also while the monetary base is constant, then:
A)it cannot be determined whether the money supply increases or decreases.
B)the money supply increases.
C)the money supply decreases.
D)the two changes exactly offset each other.

Question

Quizplus · Accepted Answer

When the Fed decreases reserve requirements, banks need to hold less reserves and can lend out more money. This leads to an increase in the money supply. If the ratio of currency to deposits decreases, it means that people are holding less cash and using more of their deposits to make purchases. This also leads to an increase in the money supply. Since the monetary base is constant, we can conclude that the increase in the money supply is due to the decrease in reserve requirements.

When the Fed Decreases Reserve Requirements, If the Ratio of Currency