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Chapter 8: Q.11 (page 235)

How can asymmetric information problems lead to a bank panic?

Short Answer

Expert verified
Asaresultoftheunfavorableselectionchallengescausedbyasymmetricknowledge,bankspanic.
Ifthereisadiscrepancyintheinformation,itwillcauseunhappiness,whichwilllowerthebank'sefficiency.

Step by step solution

01

Introduction

Asymmetric information refers to information that is not identical, hence inconsistency occurs when information presented to individuals differs from the genuine information.

02

Explanation

Asituationinwhichthebuyerhasmoreinformationthanthesellerorthesellerhasmoreinformationthanthebuyerisknownasadverseselection.
Asaresultoftheunfavorableselectionchallengescausedbyasymmetricknowledge,bankspanic.
If there is a discrepancy in the information, it will cause unhappiness, which will lower the bank's efficiency.
As a result, asymmetric information concerns are a big concern for banks.

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