Question

In the early 1930s, the currency ratio in the United States rose, as did the desired reserve ratio. Money supply analysis predicts that, all else constant, the money supply should have
a. risen.
b. remain unchanged.
c. fallen.
d. either risen or fallen, since the two factors work in opposite directions.

Answer 1

Answer: c. fallen.

The currency deposit ratio shows the amount of currency that people hold as a proportion of aggregate deposits. Description: An increase in cash deposit ratio leads to a decrease in money multiplier and money supply.

The reserve ratio is the percentage of reserves a bank is required to hold against deposits. A decrease in the ratio will allow the bank to lend more, thereby increasing the supply of money. An increase in the ratio will have the opposite effect.

So an increase in currency ratio leads to a decrease in money supply and, an increase in the reserve ratio also decreases the supply of money.