In a dramatic episode discussed in chapter 4, the money supply fell 28 percent from 1929 to 1933, which some economists blame for causing the Great Depression of the 1930s. The money supply fell, despite a rise in the monetary base, because both the currency-deposit ratio and the reserve-deposit ratio increased. Use the model of the money supply from chapter 4 and the data in the table below to answer the following hypothetical questions.
a) What would have happened to the money supply if the currency-deposit ratio had risen but the reserve-deposit ratio had remained the same?
b) What would have happened to the money supply if the reserve-deposit ratio had risen but the currency-deposit ratio had remained the same?
c) Which of the two changes was more responsible for the fall in the money supply? Explain what this means in terms of the behavior of depositors and of banks. Note that there were many bank failures in 1929 in which depositors lost their deposits.