If domestic credit is constant and the money supply changes, then:
A) reserves will remain constant.
B) foreign credit will remain constant.
C) reserves will change by a larger percentage than the change in the money supply.
D) foreign interest rates will begin to increase.

Question

Quizplus · Accepted Answer

If domestic credit is constant, then changes in the money supply can only come from changes in reserves. Thus, if the money supply changes but domestic credit is constant, then reserves must also change, and they will change by a larger percentage than the change in the money supply. This relationship is known as the money multiplier effect. Foreign credit and interest rates are not directly related to the domestic credit and money supply situation described in the question.

If Domestic Credit Is Constant and the Money Supply Changes