Consider the Diamond-Dybvig model of banks that offer deposit facilities to consumers who do not yet know whether they want to consume ‘early’ or ‘late’. a)) Outline the model and explain how demand deposit banking helps consumers to resolve the uncertainty over their consumption profile. b)Explain why even a healthy bank might fail. c)Discuss policy options for ensuring stable consumption
Consider the Diamond-Dybvig model of banks that offer deposit facilities to consumers who do not yet know whether they want to consume ‘early’ or ‘late’. a)) Outline the model and explain how demand deposit banking helps consumers to resolve the uncertainty over their consumption profile. b)Explain why even a healthy bank might fail. c)Discuss policy options for ensuring stable consumption
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the Diamond-Dybvig model of banks that offer deposit facilities to
consumers who do not yet know whether they want to consume ‘early’ or ‘late’.
a)) Outline the model and explain how
consumers to resolve the uncertainty over their consumption profile.
b)Explain why even a healthy bank might fail.
c)Discuss policy options for ensuring stable consumption
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