In an economy ‘a la Diamond and Dybvig (1983)1 where the long-term investment has a return of R = 2.25, and the bank offers r1 = 1.25 for early withdrawals or r2 = 1.947 for late withdrawals, would 58% of depositors withdrawing in the first period generate a bank run?
In an economy ‘a la Diamond and Dybvig (1983)1 where the long-term investment has a return of R = 2.25, and the bank offers r1 = 1.25 for early withdrawals or r2 = 1.947 for late withdrawals, would 58% of depositors withdrawing in the first period generate a bank run?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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In an economy ‘a la Diamond and Dybvig (1983)1 where the long-term investment has a return of R = 2.25, and the bank offers r1 = 1.25 for early withdrawals or r2 = 1.947 for late withdrawals, would 58% of depositors withdrawing in the first period generate a bank run?
a. Yes
b. Yes, but only if late depositors would earn a return less than r2
c. No
d. Yes, but only if there is deposit insurance in place
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