Question

Bank runs

a. will affect neither the money supply nor the money multiplier. 

b. increase the money supply

c. can be neither prevented nor mitigated by the Federal Reserve. 

d. are a problem because banks only hold a fraction of deposits as reserves.

Answer 1

Bank runs - are a problem because banks only hold a fraction of deposits as reserves.

Bank run occurs when a large number of depositors withdraw their money from banks simultaneously in the fear that bank may not be able to repay their deposits. Since bank keep only a fraction of the deposited amount as reserves and lend the rest of it, at a specific time it may not have enough money to repay all the depositors simultaneously thus creating a severe problem.