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NEW QUESTION: 2
Countries A and B have the same monetary base and reserve requirement. People in A tend to hold more currency than people in B.
The money supply will be:
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B. higher in A
C. same in the two countries.
Answer: A
Explanation:
When people hold currency instead of bank deposits, the money goes out of circulation temporarily and the full impact of the deposit expansion multiplier is not felt. The higher this tendency to hold currency, the lower will be the money supply, even though the monetary base has not been affected.
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Explanation
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