Suppose the public decides to hold more currency and fewer deposits in banks. Which statement describes the effects of this decision?
A) Bank reserves decrease, and the money supply eventually decreases.
B) Bank reserves decrease, but the money supply does not change.
C) Bank reserves increase, and the money supply eventually increases.
D) Bank reserves increase, but the money supply does not change.

Question

Quizplus · Accepted Answer

If the public decides to hold more currency and fewer deposits in banks, this will lead to a decrease in bank reserves, as banks have less money available to lend out. As bank reserves decrease, the banks will have less capacity to make loans and create new money, ultimately leading to a decrease in the money supply. Therefore, the correct answer is A.

Suppose the Public Decides to Hold More Currency and Fewer