Question

How do you think the currency deposit ratio affects money supply?

Answer 1

Currency-deposit ratio holds an inverse relationship with the money supply. This implies that an increase in currency deposit ratio results in a decrease in the money supply in the economy and vice-versa.

This is because an increase in currency deposit ratio implies that people increase their cash holdings as compared to the proportion of deposits held in the bank. This implies that banks would have comparatively lesser money to create credit in the economy. A reduction in credit creation will lead to a fall in money supply prevailing in the economy. The vice-versa of this process will be applicable in case of a fall in currency deposit ratio.