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Chapter 10: Q.1 (page 283)

Why are deposit insurance and other types of government safety nets important to the health of the economy?

Short Answer

Expert verified

Deposit insurance Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks.

Step by step solution

01

Step 1:Concept Introduction

Deposit insurance is an action executed in numerous nations to safeguard bank investors, in full or to a limited extent, from misfortunes made by a bank's powerlessness to pay its obligations when due.

02

Step 2:Explanation

Deposit insurance and different sorts of government wellbeing nets are essential to the strength of the economy since they instill confidence in the public. Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks. This provides saves money with a wellspring of subsidizing to make advances, which energizes the economy by getting assets to those with expected ventures. Banks likewise benefit from revenue gathered on these credits.

03

Step 3:Final Answer

Deposit insurance instills confidence in the public. Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks.

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Most popular questions from this chapter

To avoid insolvency, regulators decide to provide the bank with \(27 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, \)40 million in deposits is withdrawn. Show the effects of the capital injection and the bank run on the balance sheet. Was the capital injection enough to stabilize the bank? If the bank regulators decide that the bank needs a capital ratio of 10% to prevent further runs on the bank, how much of an additional capital injection is required to reach a 10% capital ratio?

Suppose Universal Bank holds 100million in assets, which are composed of the following:

Required reserves:10million

Excess reserves: 5million

Mortgage loans: 20million

Corporate bonds: 15million

Stocks: 25million

Commodities: 25million

Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets? Why or why not?

Why can government safety nets create both an adverse selection problem and a moral hazard problem?

How does bank chartering reduce adverse selection problems? Does it always work?

To avoid insolvency, regulators decide to provide the bank with \(27 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, \)40 million in deposits is withdrawn. Show the effects of the capital injection and the bank run on the balance sheet. Was the capital injection enough to stabilize the bank? If the bank regulators decide that the bank needs a capital ratio of 10% to prevent further runs on the bank, how much of an additional capital injection is required to reach a 10% capital ratio?
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