Question

During the Great Recession, consumer sentiment in the United States declined, leading to a decrease in consumer spending. Which of the following factors caused this decrease in consumer sentiment?a. an increase in tax rates
b. a decrease in expected income
c. a decrease in the money supply
d. an increase in household wealth
e. falling gasoline prices

Answer 1

C. A decrease in the money supply

Nearly 700 banks failed in waning months of 1929 and more than 3,000 collapsed in 1930. Federal deposit insurance was as-yet unheard of, so when the banks failed, people lost all their money. Some people panicked, causing bank runs as people desperately withdrew their money, forcing more banks to close. By the end of the decade, more than 9,000 banks had failed. Surviving institutions, unsure of the economic situation and concerned for their own survival, became unwilling to lend money. This exacerbated the situation, leading to less and less spending.