Now consider policy responses in the above economy where a bank offers a demand deposit of...

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Now consider policy responses in the above economy where a bank offers a demand deposit of (d₁,d₂)=(1.3, 3.7). Suppose the government wants to suspend convertibility of demand deposit into cash if too many agents are withdrawing. When should a suspension kick in (i.e. how many agents are allowed to withdraw at T-1) in order to avoid that a type-2 consumer withdraws at T=1? Is this number unique? [4 Points] Suppose the government designs a deposit insurance fund and insures an amount of I. b) In order to avoid a bank run of type-2 consumers, the minimum insurance is 1-3.7. Please explain if this is correct. [3 Points] Suppose I=1.3. How many type-2 consumers will withdraw at T=2? [3 Points] a) c) Now consider policy responses in the above economy where a bank offers a demand deposit of (d₁,d₂)=(1.3, 3.7). Suppose the government wants to suspend convertibility of demand deposit into cash if too many agents are withdrawing. When should a suspension kick in (i.e. how many agents are allowed to withdraw at T-1) in order to avoid that a type-2 consumer withdraws at T=1? Is this number unique? [4 Points] Suppose the government designs a deposit insurance fund and insures an amount of I. b) In order to avoid a bank run of type-2 consumers, the minimum insurance is 1-3.7. Please explain if this is correct. [3 Points] Suppose I=1.3. How many type-2 consumers will withdraw at T=2? [3 Points] a) c)

Answer rating: 100% (QA)

SOLUTION a To avoid a type2 consumer from withdrawing at T1 we need to ensure that the bank has enough reserves to cover the withdrawals of all type1 ... View the full answer