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Chapter 26: Problem 4

What is a bank panic? Why are policymakers more concerned about bank failures than about failures of restaurants or clothing stores?

Short Answer

Expert verified
A bank panic is a large-scale withdrawal of deposits from a bank due to fears of its insolvency. Policymakers are more concerned about bank failures because if a bank fails, it can lead to more bank failures and potentially cause a recession, whereas the failure of a restaurant or clothing store doesn't have the same broad impact.

Step by step solution

01

Definition of Bank Panic

A bank panic is a situation where a large number of a bank's customers try to withdraw all of their deposits at once because they fear the bank might become insolvent. This is typically caused by a loss of confidence in the bank's stability, and can cause severe economic consequences if not managed properly.
02

Importance of Banks

Banks play a vital economic role by taking deposits and lending them out to businesses and individuals. This facilitates economic activity by providing capital, and the stable functioning of banks is crucial to the economy's well-being.
03

Concern over Bank Failures

Policymakers are more concerned about bank failures than about failures of other businesses because of the potential for bank failures to have systemic effects on the economy. If a bank fails, it can create a domino effect, leading to more bank failures and potentially triggering a recession. On the other hand, the failure of an individual restaurant or clothing store is generally a local issue and doesn't have the same broad impact.

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Most popular questions from this chapter

A column in the Wall Street journal referred to policy actions aimed at "fulfilling both sides of the Fed's dual mandate." a. Who gave the Fed a dual mandate? b. Does the Fed's dual mandate require it to attain a zero percent unemployment rate? Briefly explain. c. Does the Fed's dual mandate require it to attain a zero percent inflation rate? Briefly explain.

In explaining why monetary policy did not pull Japan out of a recession in the early \(2000 \mathrm{~s}\), an official at the Bank of Japan was quoted as saying that despite "major increases in the money supply," the money "stay[ed] in banks." Explain what the official means by saying that the money stayed in banks. Why would that be a problem? Where does the money go if an expansionary monetary policy is successful?

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