Consider the expression for the consumption of Type A individuals and Type B individuals that was provided in the lecture notes. In class and in the notes we asserted that Type A individuals receive more than 1 unit of consumption if they cash out in period 1 and Type B individuals receive less than R units of consumption after 2 periods. Using the equations in the lecture notes for the consumption of Type A and Type B individuals verify that this is the case. What happens to the amount of consumption in excess of 1 that Type A individuals receive as the proportion of Type A individuals increases? Why do you think this happens? 2. In the DD model, suppose we are in the bank run equilibrium. Assuming that the bank simply pays out the full contract value of the deposit, 1∗ , until it is completely out of assets - how many depositors, or what fraction of the total population will "be stuck holding the bag" and will receive nothing back - 0 - in the bank run equilibrium?  

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Answer If the proportion of Type B individuals is sufficiently large all depositors will not receive ... View the full answer