Principles of Economics- Mankiw (5th) 602

Principles of Economics- Mankiw (5th) 602 - 622 PA R T T E...

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622 PART TEN MONEY AND PRICES IN THE LONG RUN CASE STUDY BANK RUNS AND THE MONEY SUPPLY Although you have probably never witnessed a bank run in real life, you may have seen one depicted in movies such as Mary Poppins or It’s a Wonderful Life. A bank run occurs when depositors suspect that a bank may go bankrupt and, therefore, “run” to the bank to withdraw their deposits. Bank runs are a problem for banks under fractional-reserve banking. Be- cause a bank holds only a fraction of its deposits in reserve, it cannot satisfy withdrawal requests from all depositors. Even if the bank is in fact solvent (meaning that its assets exceed its liabilities), it will not have enough cash on hand to allow all depositors immediate access to all of their money. When a run occurs, the bank is forced to close its doors until some bank loans are repaid or until some lender of last resort (such as the Fed) provides it with the currency it needs to satisfy depositors. Bank runs complicate the control of the money supply. An important exam-
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