Question 2 - Bank Risk (20 points). Suppose there are 100 young people born in each period. Each young person receives 250 goods, but nothing when middle-aged or when old. There is a storage technology, which yields 1 unit of consumption good next period for each unit held in storage this period. For each unit of capital acquired in date , 1.2 units of the consumption good will be received at date + 2. If the person liquidates capital after one period, only 0.75 goods can be obtained in + 1. Assume 10 percent of the people want to consume when middle-aged and the remainder when old. Now, consider a case in which the bank does not expect a run to occur, but everyone withdraw when middle-aged. Old consumers simply take their withdrawals and acquire the storage goods themselves.

1. How many goods did the bank invest in storage and how many good invest in capital? (bank does not expect a run to occur) 1

2. Suppose the first 10% of people (those early type people) in the line receive the full value of their deposit. How much each of these people will be able to consume?

3. Suppose the next 90% of people (those late type people) receive an equal split of remaining assets. How much each of these people will be able to consume?

4. Suppose the bank liquidates all of its assets and equally splits the value of the bank portfolio among depositors. What would each depositor be able to consume in this case?

5. If the bank anticipated a bank run and held everything in storage, what would each depositor be able to consume?