Final answer:
If the public increases their currency holdings, the money multiplier decreases, thus reducing the potential expansion of the money supply.
Step-by-step explanation:
When the public chooses to increase their holdings of currency rather than depositing it in banks, it has a negative impact on the money multiplier. The money multiplier theory posits that as banks accumulate more reserves, they can lend out more money, amplifying the overall money supply through the money multiplier effect. However, if individuals opt to keep more currency on hand, reducing bank deposits, there is a smaller deposit base available for lending. This results in a diminished money multiplier effect as banks have fewer reserves to create additional loans.
Essentially, the expansion of the money supply is hampered because less money circulates through the banking system, leading to a reduction in the creation of new loans and, consequently, a decrease in the overall money supply within the economy.