Question

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will a. decrease and the money supply will eventually decrease. b. decrease and the money supply will eventually increase. c. increase and the money supply will eventually decrease. g

Answer 1

Answer: increase and the money supply will eventually decrease

Step-by-step explanation:

Bank reserve simply means that the minimum funds that the commercial banks must have so that they'll be able to meet the requirements of the central bank.

When the people in a country gain more confidence in the banking system and so hold relatively less currency and more deposits, this will lead to an increase in the bank reserves. Since bank reserve has risen, the amount of money available that is, money supply will decrease due to the fact that the funds have been reserved and kept. It is a form of contractionary policy which is usually used when there's too much money in circulation.