Final answer:
The correct answer is option b. Janice's withdrawal of $1000 leads to a decrease in the money supply because the funds are no longer part of the bank's reserves, limiting the bank's ability to loan out money and multiply the money supply through fractional reserve banking.
Step-by-step explanation:
When Janice withdraws $1000 from the bank, this action decreases the money supply in the economy. The $1000 that was previously in the bank's reserves is now in Janice's possession as cash, reducing the bank's ability to make loans. As detailed in our reference, when a bank extends loans that are then deposited into demand deposit accounts, this increases the M1 money supply.
However, when the bank's reserves and deposits fall, as with Janice's withdrawal, it reduces the amount of money the bank can loan out, effectively decreasing the money supply in the economy. This example demonstrates the role of banks in maintaining enough reserves to meet liabilities, which impacts their capacity to expand the money supply through lending.
An important point to understand is that money held in bank reserves can be multiplied through the process of fractional reserve banking, where the reserves held by the bank form a base for creating additional money through loans. However, when money is withdrawn and held in cash form by individuals, it does not contribute to this process, which is why Janice's withdrawal of $1000 reduces the money supply. Additionally, reserve requirements maintain the stability of this system by ensuring that banks hold a portion of deposits as reserves.