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Economics 208
Marek Kapiˇ
cka
Macroeconomics
Spring 2011
Problem set 5
1 Bank Runs
Consider an economy with three periods
t
= 0
,
1
,
2. Individuals are endowed
with one unit of the consumption good at
t
= 0. There are two types of
assets. An investment in the liquid (“short”) asset yields a rate of return 1
next period. A time zero investment in the illiquid (“long”) assets gives a
return
F >
1 in
t
= 2. If the investment in the long asset is interrupted in
period
t
= 1 then the return is
f
= 1. (Since the long asset yields the same
return as the short asset when interrupted, we will assume that in period
zero everything is invested in the long asset.)
There are two types of agents. With probability
λ
the agent is an “early”
type and cares only about consumption at
t
= 1. With probability 1

λ
,
the agent is “late” and cares about the sum of consumption in both periods
t
= 2. In the aggregate,
λ
and 1

λ
also represent fractions of each type of
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This note was uploaded on 12/26/2011 for the course ECON 208 taught by Professor Staff during the Fall '08 term at UCSB.
 Fall '08
 Staff
 Macroeconomics

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