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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Bank runs are often described as “self-fulfilling prophecies.” Why is this phrase appropriate to bank runs?

To determine

The reason why bank runs are often described as “self-fulfilling prophecies” and how this phrase is appropriate to bank runs.

Explanation

The bank runs are often described as self-fulfilling prophecies and this phrase is suitable because the fear of bank runs make it happen. The fear created in people that a bank may not be able to repay the depositors can lead them to withdraw their money. As a result, if many depositors start withdrawing the money at the same time, the bank might not be able to meet their demands and will go out of funds.

Even a small rumor regarding bank run might scare the depositors and reduce the overall net worth of the bank, which eventually triggers actual bank run...

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