In the early 1930s, the currency ratio in the United States rose, as did the level of excess reserves. Money supply analysis predicts that, all else constant, the money supply should have ________.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, increases in excess reserves do not always lead to an increase in the money supply. If the banks do not lend out the excess reserves, there will be no increase in the money supply. Therefore, if the currency ratio rose and the level of excess reserves increased, it suggests that banks were holding onto their reserves rather than lending them out. This would lead to a decrease in the money supply, making choice B the best option.

In the Early 1930s, the Currency Ratio in the United