If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:
A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.

Question

Quizplus · Accepted Answer

An increase in rr means banks are holding back more reserves relative to their deposits. This decreases the amount of money that banks can lend out, and thus decreases the money supply. The constant cr and B do not affect this relationship.

If the Ratio of Reserves to Deposits (Rr) Increases, While