4. Consider the Diamond-Dybvig model of banks that offer deposit facilities to consumers who do not yet know whether they want to consume 'early' or 'late'. a) Outline the key features of the model, including the bank's budget constraint, and explain the advantages that this deposit facility brings to the consumers. b) With reference to this model, discuss whether banks are stable institution and always solvent. c) Discuss in what sense the deposit contract offered by competitive banks provides insurance. Could banks provides this insurance if consumers knew their consumption preferences with certainty before depositing funds, but the

4. Consider the Diamond-Dybvig model of banks that offer deposit facilities to consumers who do not yet know whether they want to consume 'early' or 'late'. a) Outline the key features of the model, including the bank's budget constraint, and explain the advantages that this deposit facility brings to the consumers. b) With reference to this model, discuss whether banks are stable institution and always solvent. c) Discuss in what sense the deposit contract offered by competitive banks provides insurance. Could banks provides this insurance if consumers knew their consumption preferences with certainty before depositing funds, but the