Question

If individuals hold less currency because it is easy to get currency from automatic teller machines, and everything else is the same, will the money supply be larger or smaller? OASmaller, because currency is in M(1) and M(2). O B Smaller, because the simple money multiplier will be smaller. OCLarger, because banks will be able to make more loans given the amount of reserves. The money supply will not be affected because the currency will most likely be deposited in checking accounts and be counted as part of M(1) or M(2).

Answer 1

Soln.:

Option C is correct, as if the induviduals hold less currency and its easy to have money from the the automated teller machines then the cash of people mobilised to the banks and from there the process of credit creation begins through loans, advances and investements which further creates deposit in some other bank and the process continues. The process of this creadit creation increases the purchasing power of the induviduals which is also considered as increase in money supply.

however the process of credit creation doesn't change the quantity of base money (MB) which is the government created money (Cash + Reserves),