Consumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 in period 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. The remaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw in period 1 and period 2 respectively. Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bank run?
Consumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 in period 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. The remaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw in period 1 and period 2 respectively. Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bank run?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 in
period 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. The
remaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw in
period 1 and period 2 respectively.
Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bank
run?
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