Asmall local bank has made many loans to several energy companies recently because these companies have had no problem repaying their loans in the past. if energy prices suddenly drop and the companies cannot pay their loans, what is the most likely effect on the local money supply?

the bank would not be greatly affected, and the money supply would not change.
the bank would have a minor increase in business, and the money supply would increase.
the bank would immediately make more loans, and the money supply would increase.
the bank would be negatively affected, and the money supply would decrease.

The correct answer is D.

"The bank would be negatively affected, and the money supply would decrease."

Good Luck! :)

The answer would be "D. The bank would be negatively affected, and the money supply would decrease."

Explanation:

If the prices dropped and it became difficult to pay their loans, it would negatively impact the bank because less loans would be made due to loss of money. This would decrease the amount of profit for the bank because loans are the banks only resource of income.

So if you look at the answer chhoices, you will notice that 'D' is the only one that includes a negative impact. So this makes the last choice the most reasonable answer.

:)