How will this affect the money supply in the economy

Reference no: EM133707397

Question: Suppose that a few banks in the economy begin experiencing financial difficulties and some of them fail. Suppose the central bank in the economy does not act. What do you think this shock will do to the reserve-deposit ratio and the currency-deposit ratio in the economy? How will this affect the money supply in the economy? What, then, do you expect might happen to real GDP and prices in the economy (in the short run)? Draw the AD-AS picture. In a world without deposit insurance, will the magnitude of these effects be bigger or smaller than if there is deposit insurance? (c) (2 pts) Following up from part (b): If the central bank wished to prevent this shock from affecting real GDP and prices in the economy (in the short-run), what should they do to the monetary base?

Reference no: EM133707397

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