15) Fractional reserve banking and bank runs Private Banks The Federal Reserve (Central bank) Reserves $100 Deposits $1,000 Gov't bonds $200 Monetary base (reserves currency) $100 Loans $800 Discount loans $0 Discount loans $0 Other assets $400 Net Worth $300 Net Worth $100 6 a) Suppose that people who have money in bank deposits suddenly show up at private banks and demand all of their deposits out in the form of reserves (e.g. in currency "Federal Reserve Notes"). In this situation can bankers meet the demands of their depositors? Why or why not? b) Given your answer to part a) and assuming no intervention by Fed what will banks do to try to obtain reserves? As a group will banks be successful? Given the actions of banks what is likely to happen to loans and the prices of other assets? c) What can the central bank, i.e. the Federal Reserve do to stop the bank run? Give a numerical example and show your solution on the balance sheets of the private banks and the Fed. d) Given your answer to c) what would to loans and prices of other assets