<p>question 11: why is the answer E, not D? If more people hold it as currency, wouldnt they store it in banks, thus increasing excess reserves?</p>
<p>I agree with you, unless they may mean holding onto money as literally holding onto it and not storing it into a bank or anything o.O</p>
<p>Edit: Or it may be referring to MPS.</p>
<p>Simple.
The way that the money expansion process works is if all the money that was lent out was deposited at another bank.</p>
<p>However, when the public decides to keep the currency, they neglect to deposit the currency into the bank.</p>
<p>For example, if the rr was .1 and the multiplier was 10, and the original cash deposit was 100. there would be 10 dollars reserved and 90 dollars excess. Then, that 90 dollars would be lent out to another person, who would then go and deposit that 90, 9 dollars reserved and 81 dollars excess. Theoretically, we would have $1000 at the end.</p>
<p>In this case though, if that 90 dollars was lent out, but that person decides to hold some of his/her cash and perhaps only put $70-80 in deposit, then the money expansion process becomes less expansive because for the next time they try to multiply it, they can only reserve 7-8 dollars and have 63 or 72 dollars in excess to lend out.</p>
<p>Hope that answers your question.</p>