During wars, the public tends to hold relatively more currency and relatively fewer deposits. Which statement 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 relatively more currency, there is a decrease in deposits, which means that the banks have fewer reserves. As a result, the money supply decreases. Therefore, both reserves and the money supply would decrease.

During Wars, the Public Tends to Hold Relatively More Currency