In a perfectly competitive deposit market, each bank decides how many deposits to issue taking the market deposit rate as "given." Consider each part below, explain briefly and write words and sentences.  

 a. (11points) Use an appropriate diagram to explain fully the derivation of a typical perfectly competitive bank's deposit demand curve. Next to this diagram, draw a second diagram and use it to explain the derivation of the market deposit demand curve. In this second diagram, superimpose a normally shaped supply curve for deposits on the part of the public. Use both diagrams together to explain the determination of the market clearing deposit rate, the quantity of deposits issued by the individual bank, and the total market quantity of deposits. Explain briefly but fully. Write words and sentences.

b. (11points) Use two appropriate diagrams to display an initial equilibrium position for a perfectly competitive deposit market and a typical perfectly competitive bank. During the past several years, the Federal Deposit Insurance Corporation has sharply increased the insurance premiums that it charges per dollar of bank deposit liabilities. Use your diagrams to trace through the effects of this insurance-premium increase on the market clearing deposit rate, the quantity of deposits issued by the individual bank, and the total market quantity of deposits. Explain briefly but fully. Write words and sentences.

Answer rating: 100% (QA)

a Derivation of Deposit Demand Curve in a Perfectly Competitive Market Individual Banks Deposit Demand Curve The individual banks deposit demand curve shows the quantity of deposits the bank is willin... View the full answer