Suppose all the bank customers made a pact and decided as a group to pay off...

Suppose all the bank customers made a pact and decided as a group to pay off their loans and to not take out any new loans, Ceteris Paribus,

		The money supply will increase.
		Excess reserves will decrease.
		The money supply will decrease.
		The money multiplier will decrease.

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Suppose all the bank customers made a pact and decided as a group to pay off their loans and to not take out any new loans, Ceteris Paribus,

The money supply will decrease.

(The above question is a hypothetical situation.However if all customers make a pact and as a group pay off their loan and also decide to not take out any new loans,it will lead to a fall in the money supply.The Federal Reserve controls the supply of money in the economy by means of monetary policy.It increases or decreases the Reserve Ratio of the banks as per the monetary requirement of the economy.Increase in Reserve ratio reduces the amount of money,while decrease in Reserve ratio increases the amount of money.Assuming banks have a set Reserve ratio as directed by the Federal Reserve,when the customers pay back their loans,and also decide to not take out new loans there will be an increase in the deposits of the banks.As the demand for loan decreases the supply of money will eventually decrease in the market.)

Rahul Sunny answered 1 year ago

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