The Impact of Currency-to-Bank Deposit Ratio on Monetary Base and Money Supply

What happens when the currency-to-bank deposit ratio decreases?

A. remain unchanged; decrease B. decrease; increase C. decrease; decrease D. increase; increase E. increase; remain unchanged F. remain unchanged; increase G. remain unchanged; remain unchanged H. increase; decrease

Answer:

When the currency-to-bank deposit ratio decreases, it causes the monetary base to decrease and the money supply to increase.

Explanation: When the currency-to-bank deposit ratio decreases, it means that people are holding less currency and depositing more money in banks. This has two effects on the monetary system:

Decrease in the monetary base: The monetary base is the total amount of currency in circulation plus the reserves held by banks. When people hold less currency, the amount of currency in circulation decreases. Additionally, when people deposit more money in banks, it increases the reserves held by banks. Therefore, a decrease in the currency-to-bank deposit ratio leads to a decrease in the monetary base.

Increase in the money supply: The money supply includes the currency in circulation as well as the deposits held by banks. When people deposit more money in banks, it increases the reserves held by banks. This allows banks to lend out more money, which increases the money supply.

Therefore, when the currency-to-bank deposit ratio decreases, it causes the monetary base to decrease and the money supply to increase.