An increase in the public's desire to increase its holdings of currency and coin, other factors held constant, will:
A) Increase the legal reserves of the banking system
B) Decrease the legal reserves of the banking system
C) Increase the nation's money supply since there is an increase in pocket money
D) B and C are both correct
E) None of the above are correct

Question

Quizplus · Accepted Answer

When the public decides to hold more currency and coin, they withdraw these from their bank accounts, which decreases the reserves that banks have. Banks are required to hold a fraction of deposits as reserves, so when deposits decrease because people are holding more cash, the legal reserves of the banking system decrease. This does not increase the nation's money supply; it merely shifts the form of the money from deposits to currency.

An Increase in the Public's Desire to Increase Its Holdings