Suppose households decide to hold more of their money as currency and less in the form...

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Suppose households decide to hold more of their money as currency and less in the form...

Suppose households decide to hold more of their money as currency and less in the form of demand deposits. Explain the impact this would have on the money supply. Also, explain the intuition for your result.

business economics

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Answer 1

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Answer - Because of the decision of the households to hold much of their income with themselves , rather than keeping it in bank as demand deposits , the money supply will reduce.

This is because if the money was deposited in bank , it would have increased the money supply. But , savings are the leackages for the economy and reduce the money supply. This will reduce the supply because banks will have lesser funds to lend now.

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Answer 2

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Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits.

Assume that banks do not hold excess reserves and that households do not hold currency

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Suppose households decide to hold more of their money as currency and less in the form...

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Add Answer to: Suppose households decide to hold more of their money as currency and less in the form...

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