Question

It is considered that when the public withdraws currency from the commercial banks that bank reserves fall. Therefore explain if the money supply is directly and immediately affected by this transaction.

Answer 1

When the public withdraws cash on a regular basis the bank reserves fall however, it will still have substantial reserves to loan out. An every day transactional withdrawal from banks may not really have any immediate affect on this money supply. The reason being public withdrawing will spend on goods or services or again deposit in the bank for earning interest. This keeps the money in circulation. However, if the public believes there is going to be a financial catastrophe, then they withdraw unusual large sums from the bank usually known as the bank run. In this case, the money supply reduces.