Final answer:
Kristen's ATM withdrawal of $40 from her demand deposit account reduces the bank's reserves and leads to a decrease in the money supply. The correct answer is F. decrease; decrease. This happens because the withdrawn money is no longer available in the bank to be loaned out and multiplied through banking activities.
Step-by-step explanation:
When Kristen withdraws $40 from her demand deposit account at an ATM, the reserves of the bank decrease because it has less money on hand. At the same time, the money supply in the economy decreases since these funds are being removed from the banking system where they could be otherwise used to make loans and circulate. Therefore, the correct answer is F. decrease; decrease.
Banks are required to hold a certain amount of funds in reserve to meet their liabilities. When money is withdrawn, the reserves held by the bank are reduced by that amount, meaning the bank has less money to loan out, which decreases the potential expansion of the money supply. Reserve requirements determine the amount banks must hold and not lend out. If Kristen's withdrawal causes the reserves to dip below required levels, the bank needs to restore its reserves, further limiting its ability to loan money, which would keep the money supply from increasing.