The money supply decreases if
A)households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.
B)households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans.
C)households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans.
D)households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

Question

Quizplus · Accepted Answer

If households decide to hold more currency and less deposits, this means that there is less money in circulation. Banks, on the other hand, decide to hold more excess reserves and make fewer loans, which means that they are not creating as much new money through lending activities. Together, this results in a decrease in the money supply.

The Money Supply Decreases If