If the public decides to hold more currency and fewer deposits in banks, bank reserves
A) decrease and the money supply eventually decreases.
B) decrease but the money supply does not change.
C) increase and the money supply eventually increases.
D) increase but the money supply does not change.

Question

Quizplus · Accepted Answer

If the public holds more currency and fewer deposits in banks, bank reserves decrease because there is less money deposited in banks. With fewer reserves, banks have less money to lend out, which in turn leads to a decrease in the money supply. Therefore, both bank reserves and the money supply eventually decrease.

If the Public Decides to Hold More Currency and Fewer