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If firms and households decide to reduce their currency holdings and increase their holdings of funds in their checking accounts by an equal amount, what will be the impact on the money supply if the U.S. Federal Reserve does not undertake any offsetting actions?

A)	There will be no direct impact on the money supply, however, banks’ excess reserves will decrease, which will cause them to decrease their loans, thereby leading to an indirect decrease in the money supply.

B)	There will be no direct or indirect impact on the money supply because the decrease in currency holdings will be exactly offset by the increase in the funds in the checking accounts.

C)	There will be no direct impact on the money supply. However, banks’ excess reserves will increase, which will enable them to increase their loans, thereby leading to an indirect increase in the money supply.

If firms and households decide to reduce their currency holdings and increase their holdings of funds in their checking accounts by an equal amount, there will be no direct impact on the money supply. Nevertheless, the resulting increase in excess reserves will enable banks to increase their loans, thereby leading to an indirect increase in the money supply through the multiplier effect. Putting money in a checking account increases, not decreases, bank reserves.

If the U.S. Federal Reserve decides to decrease the money supply, which of the following is most likely to occur in the short run?

A)	An increase in the velocity of money similar to decrease in the money supply.

B)	A decrease in the unemployment rate.

C)	An increase in the real rate of interest.

If the U.S. Federal Reserve decreases the money supply, an increase in nominal and real interest rates will occur. Higher real rates will cause businesses to invest less, which will cause the unemployment rate to increase. Furthermore, households will decrease purchases of durable goods, automobiles, and other items that are typically financed at short-term rates. This will decrease aggregate demand. The decrease in aggregate demand and expenditures will cause incomes to go down, which further decreases consumption and investment. Moreover, this decrease in aggregate demand will decrease real GDP and the price level in the short run and the long run.

If households are holding larger real money balances than they desire, which of the following is least likely?

A)	The interest rate is higher than its equilibrium rate in the market for real money balances.

B)	The central bank must sell securities to absorb the excess money supply and establish equilibrium.

C)	The opportunity cost of holding money balances will decrease.

If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank.

Which of the following is determined by the equilibrium between the demand for money and the supply of money?