During wars, the public tends to hold relatively more currency and relatively fewer deposits. Which of the following best describes the effects of this increase in currency holdings?
A)Reserves would decrease, and the money supply would increase.
B)Reserves and the money supply would decrease.
C)Reserves would increase, but the money supply would be unchanged.
D)Reserves would decrease, but the money supply would be unchanged.

Question

Quizplus · Accepted Answer

When the public holds more currency, the amount of deposits held in banks decreases. As a result, banks' reserves also decrease. Since banks cannot lend out more than they have in reserves, the money supply also decreases.

During Wars, the Public Tends to Hold Relatively More Currency