Homework Answers
If Cr = Currency Drainage Ratio and rr = Required reserves ratio, then
Money multiplier = (1 + Cr) / (Cr + rr), where 0 < Cr < 1 and 0 < rr < 1.
When Cr increases (from 10% = 0.1 to 20% = 0.2), then (1 + Cr) will increase more than (Cr + rr), since rr < 1. As a result, money multiplier will decrease. Since total change in money supply is the product of increase in monetary base and the money multiplier, a decrease in money multiplier will decrease total change in money supply.
So, change in money supply will be larger when individuals hold 10% of money as currency.
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