Whateffect, if any, would consumers pulling money out of checkingaccounts and putting it into home safes have on investment, interestrates, and GDP?
Therewould be a significant effect, “if consumers pulled their moneyfrom checking accounts into home safes, on investment (I), interestrates (IR), and Gross Domestic Product (GDP)”[ CITATION Mar16 l 1033 ].The implication of this move is that banks will have a drop indeposits, as consumers make large sums of withdrawals. As a result offewer bank deposits, there will be less money for the commercialbanks to offer to borrowers. Therefore, investors, entrepreneurs, andbusiness organizations would adversely be affected by the shortage ofinvestment money. A decline in the supply of loans from commercialbanks translates to a higher demand for investment funds[ CITATION Mar16 l 1033 ].For that reason, interest rates would skyrocket to meet the increaseddemand. Entrepreneurs will be forced to borrow loans at a highercost, leading to a decline in the number of people taking loans forinvestment purposes. A reduction of loanable funds by the commercialbanks implies that the economy will experience a sluggish growthhence low GDP.
Whatimpact would this action have on the size of the M1 and M2 componentsof the money supply?
supply in the market is meant to remain intact. According toMarthinsen, 2016, “the withdrawal of money from checking accountsinto home safes would cause no variation on the proportions of M1 andM2 constituents of money supply”[ CITATION Mar16 l 1033 ].M1 is an element of the money supply that represents physical money(paper and coin), checking accounts, and demand deposits. On theother hand, M2 comprises of M1, short-term deposits, and certainmoney market funds. Therefore, “withdrawal of money from checkingaccount and holding it in currency form will have no impact on thesize of M1 and M2”[ CITATION Mar16 l 1033 ].The implication of such a transaction would be an increase incurrency at the hands of the public and a decline in demand deposits.
Marthinsen, J. E. (2016). Managing in a Global Economy: Demystifying International Macroeconomics. Stamford: Cengage Learning.