A bank panic can lead to a severe contraction in economic activity due to
A)a decline in international trade.
B)the losses of bank shareholders.
C)the losses of bank depositors.
D)a decline in lending for productive investment.

Question

Quizplus · Accepted Answer

A bank panic can lead to a decline in lending for productive investment as banks become hesitant to extend credit in uncertain times, causing a slowdown in economic activity. While losses of bank shareholders and depositors may also have negative consequences, the decline in lending for productive investment is the most significant factor in causing a contraction in economic activity. A decline in international trade may be a consequence of the economic contraction but is not a direct result of the bank panic itself.

A Bank Panic Can Lead to a Severe Contraction in Economic