Suppose you are a consumer with no liquidity shock at t=1 and must decide whether to...

 

Transcribed Image Text:

Suppose you are a consumer with no liquidity shock at t=1 and must decide whether to withdraw at t=1 or t=2. If you believe that all other consumers with no liquidity shock choose to withdraw at t=2, how much do you expect to receive if you also withdraw at t=2? How much do you expect to receive if instead you withdraw at t=1? When do you then prefer to withdraw in this case? Briefly explain what a bank run is. Suppose you are a consumer with no liquidity shock at t=1 and must decide whether to withdraw at t=1 or t=2. If you believe that all other consumers with no liquidity shock choose to withdraw at t=2, how much do you expect to receive if you also withdraw at t=2? How much do you expect to receive if instead you withdraw at t=1? When do you then prefer to withdraw in this case? Briefly explain what a bank run is.

Answer rating: 100% (QA)

Solution Heres a breakdown of the scenario and an explanation of bank runs Scenario Analysis Assumptions You are a consumer in a banking system where ... View the full answer