Question

If bank depositors hold more cash and fewer deposits, the monetary base does not change, only the composition of it does. Explain why in your own words. 300 words

Answer 1

If the bank depositor is holding more cash and fever deposit, it will mean that the monetary base will not be changing.

Monetary base of an economy is comprising of cash and other liquid form of assets along with the bank reserves so if the Bank deposit is holding more cash and fewer deposit, it will not be changing the overall complexion of the the monetary base because monetary base is the combination of all the security so it will also mean that the overall flow into the monetary base of the economy is not going to change due to change in the proportion of the assets that's been held by the bank.

when the depositors are holding more cash & fewer deposit, it will mean that the depositors are having higher amount of cash in their hands and lower amount of deposit, but when an individual is drawing out the money from the deposits of the bank, it will mean that the cash in hand in the overall economy will be increasing and the bank deposits will be decreasing but since cash in hand and Bank deposits are both the part of the monetary base of an economy so the monetary base is remaining unchanged only the proportion of monetary base is going to change due to such transactions.

so it can be said that cash and Bank deposits are both the component of monetary base of an economy and any change between them is not going to affect the overall value of the monetary base, it will only affect the complexion of the overall monetary base ,ibut the entire amount of monetary base is going to remain the same.