Interest rates and economic output during sub prime crisis

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Consider a closed economy which has suffered from a sub-prime crisis. During such a crisis households and bankers often become more cautious. Depositors withdraw their money from banks, preferring to hold their money in currency form. Bankers also increase their reserve ratios so that they have enough cash on hand to meet the depositors demand.

What effects would the above have on an economy's output and interest rate and how would they be affected in the short run given the above scenario?

Reference no: EM1370713

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