What causes money supply to decrease?

By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks’ reserve requirements, the Fed is able to decrease the size of the money supply.

What shrinks the money supply?

So payment of government fees, fines, loans and taxes shrinks the money supply, as does the repayment of bank loans. Bankruptcy will slow this shrinkage.

What causes changes in money supply?

higher demand for credit will push up interest rates, making it more attractive for banks to supply credit. Higher interest rates may encourage depositors to switch money from sight accounts to time accounts. Banks can then decrease liquidity ratio. Lower interest rates cause increase in money supply.

Why did the money supply fall during the Great Depression?

The money stock fell during the Great Depression primarily because of banking panics. Banking systems rely on the confidence of depositors that they will be able to access their funds in banks whenever they need them.

Does money shrink?

As the ammonia evaporates, the dollar bill shrinks. This process can be repeated several times to shrink the bill even more. A normal dollar bill has dimensions of 15.7 cm by 6.6 cm.

What shifts the money supply curve?

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left).

Why does the money multiplier decrease during recession?

Banks may be reluctant to lend, and they’ll maybe put more cash in reserve. Plus, people tend to hold more cash and not deposit their money in banks during a recession. Both of these factors cause the money multiplier to fall.