Question

Trevor goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?

1) The monetary base will increase with the increase in currency in circulation.
2) The monetary base will decline as bank reserves fall.
3) The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.
4) The monetary base will increase by less than the size of the withdrawal as the increase in the currency in circulation will not be completely offset by a decrease in bank reserves.

Answer 1

The monetary base will remain unchanged with the increase in currency in circulation being exactly offset by a decrease in bank reserves.

Step-by-step explanation:

The withdrawal of $500 in cash from an ATM machine will affect the monetary base in the following way:

1. The monetary base will remain unchanged with the increase in currency in circulation being exactly offset by a decrease in bank reserves.

When Trevor withdraws $500 in cash, the currency in circulation increases by $500. However, since the withdrawal reduces the bank's reserves by an equal amount, the overall monetary base remains the same.