A decrease in the volume of discount loans
A)increases the monetary base, but decreases the money supply.
B)decreases the monetary base, but increases the money supply.
C)increases both the monetary base and the money supply.
D)decreases both the monetary base and the money supply.

Question

Quizplus · Accepted Answer

Discount loans are a component of the monetary base, so when there is a decrease in the volume of discount loans, the monetary base decreases. Since the money supply is built on top of the monetary base, a decrease in the base leads to a decrease in the money supply as well. Therefore, both the monetary base and the money supply decrease, making option D the correct answer.

A Decrease in the Volume of Discount Loans