An increase in ________ reduces the money supply since it causes the ________ to fall.

Question

BlackTom AI · Accepted Answer

The question asks about how an increase in a policy variable affects the money supply and through which mechanism this occurs.
Option 1: 'margin requirements; money multiplier' Margin requirements relate to consumer or asset purchases, not the banking system's reserve relationship. They do not determine the money multiplier in the standard money supply framework, so this pairing is not the mechanism by which the money supply falls. Therefore this option is incorrect.
Option 2: 'margin requirements; monetary base' Even if margin requirements change, the monetary base (currency in circulation plus reserves) is set by central bank actions, not by margin rules. Thus this option incorrectly links margin requirements to the monetary base and misidentifies the controlling channel for money supply changes.
Option 3: 'reserve requirements; monetary base' While increasing reserve requirements does tighten banks, it does not directly reduce the monetary base itself. The monetary base is influenced by central bank operations (e.g., open market operations) and currency in circulation, so tying reserve requirements to a fall in the monetary base is inaccurate. This makes the option incorrect.
Option 4: 'reserve requirements; money multiplier' Here, higher reserve requirements raise the reserve ratio, which lowers the money multiplier (the amount of money the banking system can create per unit of base money). Since the money supply equals the money multiplier times the monetary base, a fall in the multiplier leads to a reduction in the money supply. This option correctly identifies both the triggering policy variable and the mechanism.}

An increase in reduces the money supply since it causes the to fall.Single choice

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An increase in ________ reduces the money supply since it causes the ________ to fall.Single choice