Suppose the proportion of deposits that individuals wish to hold as cash were to rise from 5% to 10%.Then,

Question

Quizplus · Accepted Answer

If the proportion of deposits that individuals wish to hold as cash were to rise from 5% to 10%, then bank deposits will fall by the same amount as if the reserve-holding ratio had risen by 5 percentage points. This is because the increase in the desired cash-to-deposit ratio will lead to a decrease in the money multiplier, which will in turn lead to a decrease in the money supply. The correct answer is B.

Suppose the Proportion of Deposits That Individuals Wish to Hold