Suppose That Households Became Mistrustful of the Banking System and Decide

question 167

Multiple Choice

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should

• A)increase.
• B)decrease.
• C)not change.
• D)increase,then decrease.

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Definitions:

Present Consumption

The use of goods and services for immediate satisfaction or needs, as opposed to saving or investing for future use.

Behavioral Economists

Economists who study the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.

System 2

A concept from cognitive psychology that refers to the deliberate, analytical, and slow way of thinking, as opposed to quick, instinctual decisions.

Endowment Effect

The tendency for people to value something more highly simply because they own it.