Question

In each of the following cases, what would you expect to happen to currency-deposit ratio? a)...

In each of the following cases, what would you expect to happen to currency-deposit ratio?

a) Interest rates on demand deposits rise

b) A rise of underground economic Activity

c) A tremendous wave of counterfeight bills hits Turkey

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Answer #1

a). If the interest rates on demand deposits rise then people will increase the amount of deposits they hold relative to their currency holdings. Therefore, the currency-deposit ratio will decrease.

b). A rise in underground economic activity takes place in cash holdings as it is easy to hide from tax authorities. The deposits will decline as more people engage in underground economic activity by using currency and drawing down their deposits. Therefore, currency-deposit ratio will increase.

c). A tremendous wave of counterfeit Bill's hitting Turkey will increase the currency-deposit ratio because these Bill's cannot be deposited in banks and will be used in currency form in the economy.

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