If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then:
A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen.
B) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen.
C) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen.
D) it is impossible to be certain whether the money supply would fall or rise in this case.

Question

Quizplus · Accepted Answer

When the monetary base falls and the currency-deposit ratio rises, it means that people are holding more currency than deposits. As a result, banks have a smaller amount of deposits to work with, which in turn reduces the money supply. However, if the reserve-deposit ratio remains the same, then banks are still able to lend out the same proportion of their deposits. Therefore, although the money supply would fall, it would not fall by as much as it would have if the reserve-deposit ratio had risen.

If the Monetary Base Fell and the Currency-Deposit Ratio Rose