Question

A currency drain occurs when

- the Fed increases the required reserve ratio.
- Fed sells U.S. government securities.
- non-bank public increases its holdings of currency outside the banking system.
- banks reduce the number of loans they create with their excess reserves.
- Fed buys U.S. government securities.

Answer 1

The correct answer is: non-bank public increases its holdings of currency outside the banking system.

Step-by-step explanation:

A currency drain refers to the situation where there is an increase in currency held outside the banking system. When the public holds more money outside the banking system, it reduces the total reserves of the banks. The excess reserves get reduced as well.

The currency gets drained from the banking system, so banks can create less money. This causes a reduction in the money supply.