Check Your Understanding l. 2. 3. Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans. Every depositor knows that the rumor isn't true, but each thinks that most other depositors believe the rumor. Why, in the absence of deposit insurance, could this lead to a bank run? How does deposit insurance change the situation? -A con artist has a great idea: he'll open a bank without investing any capital and lend all the deposits at high interest rate-s to real estate developers. If the real estate market booms, the loans will be repaid and he'll make high prots. If the real estate market goes bust, the loans won't be repaid and the bank will fail"but he will not lose any of his own wealth. How would modern bank regulation frustrate his scheme? Assume that total reserves are equal to $200 and total checkable bank deposits are equal to $1,000. Also assume that the public does not hold any currency and banks hold no excess reserves. Now suppose that the required reserve ratio falls from 20% to 10%. Trace out how this leads to an expansion in bank deposits. 4. Take the example of Silas depositing his $1,000 in cash into First Street Bank and assume that the required reserve ratio is 10%. But now assume that each recipient of a bank loan keeps half the loan in cash and deposits the rest. Trace out the resulting expansion in the money supply through at least three rounds of deposits. TACKLE THE AP TEST: Multiple-Choice Questions 1. Bank reserves include which of the following? currency in circulation bank deposits held in accounts at the Federal Reserve customer deposits in bank checking accounts the monetary base all of the above EDP-PST.\" 2. The fraction of bank deposits actually held as reserves is the 3. a. reserve ratio. b. required reserve ratio. c. excess reserve ratio. .d. reserve requirement. .e. monetary base. Bank regulation includes which of the following? deposit insurance capital requirements reserve requirements the discount Window all of the above e999\