In 2012 and again in 2015, citizens of Greece were reported to be withdrawing their savings from Greek banks because they feared that Greece would leave the European Union. What is consistent with what the open-economy macroeconomic model predicts?
A) This event should have raised Grecian interest rates and caused the Grecian currency to appreciate.
B) This event should have raised Grecian interest rates and caused the Grecian currency to depreciate.
C) This event should have lowered Grecian interest rates and caused the Grecian currency to appreciate.
D) This event should have lowered Grecian interest rates and caused the Grecian currency to depreciate.

Question

Quizplus · Accepted Answer

According to the open-economy macroeconomic model, when individuals withdraw their savings from banks, the supply of loanable funds decreases, which causes interest rates to rise. This should have raised Grecian interest rates. Additionally, when people withdraw their savings from their bank accounts, it increases the demand for foreign currencies, causing the domestic currency to depreciate. Therefore, the event should have raised Grecian interest rates and caused the Grecian currency to depreciate, making choice B the correct answer.

In 2012 and Again in 2015, Citizens of Greece Were