In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks. Banks' desired reserve/deposit ratio is 10 percent. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50 percent to 75 percent, the money supply in Macroland will ________.
A)increase.
B)decrease.
C)remain the same.
D)either increase or decrease.

Question

Quizplus · Accepted Answer

When the public desires to hold more cash, some cash is drawn from banks reducing the bank reserves. Since the money multiplier applies only to bank reserves and not to currency held by the public, fewer reserves and more currency held by public will reduce the money supply.

In Macroland There Is $1,000,000 in Currency That Can Either