Describe the role of uncertainty at the beginning of and in the ...

[bclement10]

Describe the role of uncertainty at the beginning of and in the unfolding of a financial crisis.
 
  What will be an ideal response?

Question 2

In the two-period model with asymmetric information, a bank
 
  A) creates money.
  B) keeps money safely.
  C) multiplies reserves.
  D) borrows and lends.

[kusterl]

Answer to Question 1

Regardless of the initial spark, an adverse event within and/or affecting the financial sector becomes a systemic crisis when it gives rise to substantial uncertainty. Because the gathering, analysis, and strategic use of information is a core function of financial institutions, an increase in uncertainty can disrupt the very mechanisms that, under normal circumstances, reduce and manage uncertainty. Thus, the key impacts of an increase in uncertainty are impairment of abilities to deal with uncertainty and further increases in uncertainty. The spiral of rising uncertainty will end only when the loss of value and the paralysis of financial operations is so complete as to inspire confidence that it cannot get worse.

Answer to Question 2

D

[bclement10]

Excellent

[jojobee318]

TYSM