Question 2. Bank Run. Consider the Diamond-Dybvig model we discussed inclass. Suppose marginal utility of consuming c is given by c². Gross interestrate is R = 1.5. Time preference is ẞ = 0.9. Probability of becoming first typeis λ = 0.2.a) What is the efficient consumption level of type 1 (c†) and type 2 (c). You need to solve for optimality condition and resource constraint.Answer must be numeric.b) Explain why 1 < c†, and c½ < R is better than cı=1 and C2=R.c) Now consider the contract we discussed in class that the bankoffers. Suppose ri-1. Explain why there wouldn't be a bank run inthis situation. Why this is not a desirable contract?Question 3. Yield Curve. Find the data on yield curve on website of theDepartment of the Treasury (link). Plot the yield curve for 2015-10-13 and2015-11-10.a) Explain how the yield curve changed? What is the underlyingreason for this change?b) What is the impact of the chage of the yield curve on bankprofitability and balance sheet?c) Now, we will focus on 2022 and 2023. Calculate the average yieldof 10 year government bond in February 2022 and February 2023. Whatis the change in price of 10 year government bond? What is the impacton balance sheet of a bank with high share of securities on its balancesheet. Discuss it's impact on the possibility of a bank run.

Answer 2:The inherent instability in financial institutions brought about by an imbalance between…

Question 2. Bank Run. Consider the Diamond-Dybvig model we discussed in class. Suppose marginal utility of consuming c is given by c-². Gross interest rate is R = 1.5. Time preference is ẞ = 0.9. Probability of becoming first type is λ = 0.2. a) What is the efficient consumption level of type 1 (c)) and type 2 ( c). You need to solve for optimality condition and resource constraint. Answer must be numeric. b) Explain why 1 < c^, and c½ < R is better than c₁ = 1 and C2 = R. c) Now consider the contract we discussed in class that the bank offers. Suppose r₁ = 1. Explain why there wouldn't be a bank run in this situation. Why this is not a desirable contract?

Question 2. Bank Run. Consider the Diamond-Dybvig model we discussed in class. Suppose marginal utility of consuming c is given by c-². Gross interest rate is R = 1.5. Time preference is ẞ = 0.9. Probability of becoming first type is λ = 0.2. a) What is the efficient consumption level of type 1 (c)) and type 2 ( c). You need to solve for optimality condition and resource constraint. Answer must be numeric. b) Explain why 1 < c^, and c½ < R is better than c₁ = 1 and C2 = R. c) Now consider the contract we discussed in class that the bank offers. Suppose r₁ = 1. Explain why there wouldn't be a bank run in this situation. Why this is not a desirable contract?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.14P

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