The non-bank public chooses among various financial assets in deciding in what form it wants to hold liquidity. It thereby increases or decreases
I. the M1 measure of money supply.
II. the reserves of commercial banks.
III. the reserves that commercial banks are required to hold.
A) none of the above since only the Fed can alter the money supply
B) I, II, and III
C) I and II only
D) I only

Question

Quizplus · Accepted Answer

The non-bank public's decision to hold liquidity in different financial assets affects the M1 measure of money supply because it includes currency in circulation and demand deposits, which are affected by the public's demand for cash and deposits in banks. It also affects the reserves of commercial banks because when individuals deposit funds into their bank accounts, it increases the banks' reserves. However, it does not affect the reserves that commercial banks are required to hold since that is determined by the Fed's monetary policy. Therefore, option C is the best choice as it correctly identifies the impacts on M1 and reserves of commercial banks but excludes option III as it is incorrect.

The Non-Bank Public Chooses Among Various Financial Assets in Deciding