The greater the currency drain ratio,
A) the smaller is the quantity of deposits and money that the banking system can create.
B) the larger the ratio of excess reserves to currency.
C) the smaller is the quantity of currency the public hold outside the bank.
D) the larger is the quantity of deposits and money that the banking system can create.
E) None of the above.

Question

Quizplus · Accepted Answer

The currency drain ratio reflects the preference of the public to hold currency outside the banking system rather than depositing it. A higher currency drain ratio means that more money is held in physical form by the public and less is available to the banks to create deposits and money through the lending process. Therefore, the banking system can create a smaller quantity of deposits and money.

The Greater the Currency Drain Ratio