The Great Inflation affected the banking industry through the following channels.
A) lower nominal interest rates
B) decline in deposits
C) decreased competition among banks
D) all of the above

Question

Quizplus · Accepted Answer

During the Great Inflation, higher inflation rates typically led to higher nominal interest rates as lenders demanded higher returns to compensate for the decreased purchasing power of money. This environment could lead to a decline in deposits as individuals sought higher returns in more inflation-resistant investments rather than traditional bank savings accounts, which might offer lower returns. Therefore, the correct impact is a decline in deposits. Increased inflation does not inherently decrease competition among banks; it could actually increase competition as banks seek to attract deposits by offering higher interest rates.

The Great Inflation Affected the Banking Industry Through the Following