An economy is better able to withstand a shock to the money demand if:
A) the backing ratio is lower.
B) the country holds more domestic assets.
C) the backing ratio is higher.
D) the country holds fewer reserves.

Question

Quizplus · Accepted Answer

A higher backing ratio means that the country has a larger share of its money supply backed by reserves, making it more capable of withstanding a shock to the money demand. This is because there are more reserves available to satisfy the demand for money, while a lower backing ratio would mean there are fewer reserves to meet the demand. Holding more domestic assets or fewer reserves may not necessarily improve the economy's ability to withstand a shock to money demand.

An Economy Is Better Able to Withstand a Shock to the Money