CFA Practice Question

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CFA Practice Question

Countries A and B have the same monetary base and reserve requirement. People in A tend to hold more currency than people in B. The money supply will be ______.
A. higher in B
B. same in the two countries
C. higher in A
Explanation: When people hold currency instead of bank deposits, the money goes out of circulation temporarily and the full impact of the deposit expansion multiplier is not felt. The higher this tendency to hold currency, the lower will be the money supply, even though the monetary base has not been affected.

User Contributed Comments 4

User Comment
oneashok good one!
jasonkwk dun understand, can explain more?
praj24 If people hold more currency, then bank are unable to loan out the currency - reserve requirement. Therefore, unable to increase the money supply.

So, people in country B tend to not hold currency in comparison to country A, instead using bank deposits, Thus the money supply will be greater in country B
thanhb91 Isnt the money supply is a stock of currency and other liquid instruments? Which included checking and saving account! It doesnt necessarily mean money in circulation at all?
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