Question

In 2011, Argentina prevented individuals from withdrawing more than 200 pesos per day from their bank accounts. Without these limitations it was believed individuals would have attempted to withdraw all the money from their accounts.
If unlimited withdrawals were allowed, real GDP should______ while the price level would
______

Answer 1

Answer:

If unlimited withdrawals were allowed and people really withdraw all their money, real GDP should decrease while the price level would decrease.

Explanation:

If individuals withdraw all the money from their accounts, it will dry up the money available to lend to businesses. It will lead to a credit crisis causing firms to go bankrupt. Production will halt. The economy (and thus GDP) will shrink.

As banks have to return all deposited money, they will have to convert their assets into cash by selling them. That would lead to waves of sell-off that affect general price level. Also, in such difficult time, people will hold on to their savings and not make purchases or invest, the price level would decrease.

That is a self-reinforcing recession/depression.