Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.
A)decreased; decreased
B)decreased; increased
C)increased; decreased
D)increased; increased

Question

Quizplus · Accepted Answer

When the public increases their currency-deposit ratio, it means they are holding more money as currency rather than depositing it in banks. This reduces the base on which banks can create money through the fractional reserve banking system. When banks increase their reserve-deposit ratio, they are holding more reserves relative to deposits, which further limits their ability to create new money through lending. Both actions together would shrink the money supply by the greatest amount.

Suppose There Was a Banking Crisis