The situation where bank run occurs due to absence of deposit insurance. Also, analyze the change when deposit insurance is present.
Explanation of Solution
If there is rumor about bank failure then being a depositor, it is rational to withdraw the amount before bank fails completely that it could not repay the amount. This will be in the case when there is no deposit insurance.
In case of deposit insurance, a depositor after hearing such rumor will not withdraw the amount as insurance company will pay the amount deposited in the bank even if bank leads to failure. Therefore, in case of presence of deposit insurance, bank run situation will not occur.
Federal Reserve System: It is a central bank that looks after the banking system of the country along with the control of its monetary base. Monetary base is the sum of circulating currency and the reserves in the bank.
Want to see more full solutions like this?
Chapter 25 Solutions
Krugman's Economics For The Ap® Course
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education