Question at position 19 The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positivelySingle choice
A
positively; negatively
B
negatively; negatively
C
negatively; positively
D
positively; positively

Question

Question at position 19 The money supply is related to expected deposit outflows, and is related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positivelySingle choice

A

positively; negatively

B

negatively; negatively

C

negatively; positively

D

positively; positively

BlackTom AI · Accepted Answer

Bank liquidity needs and central-bank responses explain the relationships: money supply rises when banks expect larger deposit outflows, and money supply falls when market interest rates rise — hence “positively; negatively.”

1) Relevant concepts
- Monetary base (central-bank liabilities) and money supply (deposits × money multiplier).
- Banks’ liquidity needs: expected deposit outflows force banks to obtain reserves (by borrowing or selling assets).
- Central bank lender-of-last-resort and open-market operations: central bank can supply reserves or withdraw them, affecting the monetary base and via the multiplier the broader money supply.
- Interest-rate effects: policy/open-market operations and borrowing costs influence credit creation and deposit formation.

2) Step-by-step reasoning
- If banks expect larger deposit outflows, they anticipate higher reserve needs. To meet expected withdrawals and avoid runs, banks will obtain liquidity by (a) borrowing from the central bank or interbank market or (b) selling assets. If the central bank actively accommodates to stabilize the system, it supplies additional reserves (increasing the monetary base). Even if banks sell assets to each other, liquidity injections by the central bank are common to prevent systemic problems.
- An increase in the monetary base, holding the money multiplier roughly constant (or even with a smaller multiplier, often the base injection dominates), raises the broad money supply (M1/M2). Thus money supply is positively related to expected deposit outflows because expected outflows trigger reserve/ liquidity provision that increases the monetary base and hence money supply.
- Conversely, a higher market interest rate usually reflects tighter monetary policy or leads to reduced borrowing. The central bank raises rates by selling securities or reducing reserve provision, which lowers the monetary base; higher rates also reduce loan demand and deposit creation. Both channels cause the money supply to fall as market interest rates increase — a negative relationship.

3) Why other options are incorrect
- “Negatively; negatively”: ignores central-bank accommodation that typically increases the monetary base in response to expected outflows.
- “Negatively; positively”: contradicts the fact that higher market rates are associated with contractionary policy and lower money supply.
- “Positively; positively”: incorrectly asserts money supply rises with higher market rates, contrary to how rate tightening reduces reserves and credit creation.

Conclusion: therefore the correct pairing is “positively; negatively,” matching the provided answer.

Question at position 19 The money supply is related to expected deposit outflows, and is related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positivelySingle choice

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Question at position 19 The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positivelySingle choice

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Question at position 9 Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. banks; depositors depositors; borrowers depositors; banksborrowers; depositors

Question at position 11 The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.negatively; negativelypositively; positivelypositively; negatively negatively; positively

Question at position 8 Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. borrowers; depositorsdepositors; borrowers banks; depositors depositors; banks

Question at position 8 If the required reserve ratio is 10%, currency in circulation is $300 billion, checkable deposits are $900 billion, and excess reserves total $1 billion, then the money supply is ________ billion. $2700$1200$1800$3000$3100

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Question at position 19 The money supply is related to expected deposit outflows, and is related to the market interest rate.positively; negatively negatively; negativelynegatively; positivelypositively; positivelySingle choice

Question at position 9 Decisions by about their holdings of currency and by about their holdings of excess reserves affect the money supply. banks; depositors depositors; borrowers depositors; banksborrowers; depositors

Question at position 11 The money supply is related to expected deposit outflows, and is related to the market interest rate.negatively; negativelypositively; positivelypositively; negatively negatively; positively

Question at position 8 Decisions by about their holdings of currency and by about their holdings of excess reserves affect the money supply. borrowers; depositorsdepositors; borrowers banks; depositors depositors; banks