Krugman's Economics For The Ap® Course
3rd Edition
ISBN: 9781319113278
Author: David Anderson, Margaret Ray
Publisher: Worth Publishers
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Question
Chapter 25, Problem 1CYU
To determine
The situation where bank run occurs due to absence of deposit insurance. Also, analyze the change when deposit insurance is present.
Expert Solution & Answer
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.
Economics Concept Introduction
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.
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Chapter 25 Solutions
Krugman's Economics For The Ap® Course
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