1. reduce the stock of base money.
2. reduce the stock of money.
3. increase the stock of money.
4. increase the money multiplier.
Choose the correct option.
The right option is 2. The withdrawl of cash will remove reserves and deposits from the commercial banks in equal measure. To maintain their cash reserve ratios, the banks will have to call in their loans and set the funds aside as reserves. This means that total deposits, and the money supply, will fall by some multiple of the initial withdrawl of deposits. The money multiplier will decline. As long as the central bank takes no action the stock of high-powered money will remain unchanged. The existing stock of base money will now support a smaller money stock. Since f < 1 an increase in c increases the denominator of the mm equation proportionally more than it increases the numerator, causing mm to decline.