assume a country’s banking system has limited reserves. which event would have caused the shift of the money supply curve from s1 to s2 in the money market shown above?
If a country’s banking system has limited reserves, there are several events that could cause the shift of the money supply curve from s1 to s2 in the money market. Here are a few possible scenarios:
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Change in Reserve Requirements: If the central bank of the country increases the reserve requirements for commercial banks, this would result in a decrease in the available reserves for lending. As a result, banks will have to reduce their lending activities, causing a decrease in the money supply and shifting the curve from s1 to s2.
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Open Market Operations: If the central bank sells government securities (such as bonds) in the open market, it withdraws funds from the banking system. This action reduces the reserves held by commercial banks, leading to a contraction in the money supply and shifting the curve from s1 to s2.
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Decrease in Foreign Reserves: If a country experiences a significant decrease in its foreign reserves, it may put pressure on the banking system. In order to stabilize the currency, the central bank might intervene by selling its foreign reserves. This decrease in reserves will reduce the money supply, causing a shift from s1 to s2.
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Bank Failures: If several banks within the country face financial difficulties and fail due to insolvency or other reasons, it can have a significant impact on the money supply. The loss of these banks reduces the amount of money available for lending, leading to a contraction in the money supply and a shift in the curve from s1 to s2.
It’s important to note that the specific event causing the shift from s1 to s2 would depend on the circumstances of the country and its banking system. The above scenarios are examples that can lead to a shift in the money supply curve in a country with limited reserves.