What happens to the monetary base if people increase their currency holdings while everything else remains constant?

When people increase their currency holdings, they are choosing to hold more physical cash rather than depositing it in banks. The monetary base, which comprises currency in circulation and reserves held by banks at the central bank, initially remains unchanged because it is primarily determined by the central bank's monetary policy decisions.

As individuals increase their currency holdings, the total amount of currency in circulation rises. However, since the quantity of money is often categorized into different measures like M1 and M2, this shift could affect the broader money supply. M2 includes M1 (which includes currency and demand deposits) as well as other types of accounts like savings accounts. If people withdraw from their deposits to hold cash, the composition of M2 can shift, and there might be a decline in the M2 measure even though the overall monetary base does not change immediately.

Thus, the assertion that the monetary base does not change aligns with the fact that the central bank has not increased the supply of reserves or currency, while the quantity of M2 can decrease due to the decrease in demand deposits held in banks as people choose to convert that money into cash. This dynamic highlights how the behavior of individuals can influence the structure of the monetary supply, even when the foundational base remains constant.