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Numerous banks failed during the Great Depression. If MB stayed the same, what did that do...

Numerous banks failed during the Great Depression. If MB stayed the same, what did that do to M1 and why?

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Ans- M1 is the money supply including currency and demand deposits (checking accounts).As can be seen, after 1929 all but one of the quantities declined at increasing rates. The amount of currency in circulation actually increased but it is such a small component of the money supply its increase was of no significance. The decline in money supply led to lower prices; i.e.. a negative rate of inflation, deflation. Investment purchases are affected by the rate of interest minus the rate of inflation, the so-called real rate of interest. When there is deflation the real rate of interest is higher than the nominal rate of interest charged by lenders. So even though the nominal interest rate was declining from 1929 to 1933 businesses were experiencing record high real interest rates.

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