Suppose you are a depositor at Melvin's Bank, which has the balance sheet shown in Table 10.1A. Deposit insurance does not exist. You originally deposited your money in Melvin's Bank because its branch locations are more convenient than those of other banks.

a. Suppose you know that Melvin's other depositors plan to keep their money there. Should you do the same or withdraw your money and deposit it elsewhere?
b. Suppose you know that other depositors plan to make large withdrawals from Melvin's Bank. What should you do?
c. What do your answers to parts (a) and (b) tell you about the likelihood and causes of bank runs?

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TABLE 10.1 A Run on Melvin's Bank (A) Initial Balance Sheet (B) Balance Sheet After Rurn Assets Liabilities and Net Worth Assets Liabilities and Net Worth Reserves 10 Checking deposits50 Securities 30 Savings deposits 50 20 120 Reserves Checking deposits 10 Securities 0 Savings deposits 10 Loans TOTAL Loans Net worth TOTAL 0 Net worth 0 TOTAL 120 TOTAL