Question

1. What will happen to the money supply (increase, decrease or stay the same) in the...

1. What will happen to the money supply (increase, decrease or stay the same) in the following situations:

a. Consumers become concerned that their deposits at a bank are not safe.

b. The Federal Reserve changes the required reserve ratio and banks do not need to hold as many deposits in reserve.

c. Because of the Great Recession, banks are not able to find as many credit-worthy borrowers as in the past.

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Answer #1

a. The consumers don't have a safe feeling of  their deposits at bank, so they will withdraw the money. As a result, money supply decreases.

b. Banks need not hold many deposits in reserve, so they will have excess reserve to lend out as loan. As a result, money supply increase.

c. Banks are not able to find credit-worthy borrowers, so banks will reduce their lending. The volume of loans and deposits will shrink, and the money supply will decrease.

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