Which of the following best describes how bank insolvencies reduce output?
A)Insolvency → wealth ↓→ consumption ↓→ AE ↓→ output ↓
B)Insolvency → number of banks ↓→ loans ↓→ AE ↓→ output ↓
C)Insolvency → investment ↑→ AE ↓→ output ↓
D)Insolvency → risk ↓→ loans ↑→ inflation ↓→ output ↓

Question

Quizplus · Accepted Answer

Bank insolvencies lead to a reduction in the number of banks, which decreases the availability of loans, reducing aggregate expenditure (AE) and thus output.

Which of the Following Best Describes How Bank Insolvencies Reduce