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Author Question: It is in the interest of each depositor to withdraw her money from a bank if all other depositors ... (Read 78 times)

JMatthes

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on: Jun 30, 2018
It is in the interest of each depositor to withdraw her money from a bank if all other depositors are doing the same, even when the bank's assets are sound. Discuss. As part of your answer clearly state whether the statement is true or false.
 
  What will be an ideal response?

Question 2

When an economy is in a liquidity trap
 
  A) monetary policy cannot be used to influence the exchange rate.
  B) monetary policy can be used to drive interest rates down, but not to drive them up.
  C) there is an excess demand for bonds.
  D) people and institutions avoid holding cash balances.
  E) it can escape only by introducing a hard, or illiquid, currency.


Ddddd

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Reply #1 on: Jun 30, 2018
Answer to Question 1

True. Students should elaborate on bank run and stress the atmosphere of financial panic, which will lead to self-fulfilling expectations.

Answer to Question 2

A


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