Chapter 25, Problem 2CYU

To determine

The way in which modern bank regulation will frustrate his scheme.

Explanation of Solution

Banking regulations can prevent such act where bank owner has to bear zero loss by demanding to keep assets whose worth is more than the total amount of deposits in the bank.

Bank owner by keeping assets worth the amount more than the deposits will have to lose if loans are unpaid. The risk will be transferred to bank owner if such regulatory policies are imposed. If loans remains unpaid then government can cover the losses by using assets and burden will not be bear by the government.

Economics Concept Introduction

Federal Reserve System: It is a central bank that looks after the banking system of the country along with the control of its monetary base. Monetary base is the sum of circulating currency and the reserves in the bank.