How could the rumor of a bank failure actually turn into a bank failing? Is the bank really without assets?
Individuals who heard a rumor that their bank was about to fail, generally hurried to the bank to withdraw their account balances. As a result, more and more individuals also make a run on the bank. Since banks only keep a portion of their assets in cash reserves, a heavy demand on the cash balances of large numbers of accounts creates a severe cash drain, and in effect the rumor becomes reality. Banks would still hold assets, but at the short notice of a run on the bank would be unable to convert those holdings to cash in order to satisfy their customers' demands for cash.
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When we hear on the news, "The Fed has lowered interest rates today," the Fed has most likely
A) raised the discount rate. B) lowered the required reserve ratio. C) raised the federal funds rate. D) purchased government bonds.
When a country has a negative current account, that country is
A) borrowing from the rest of the world. B) lending to the rest of the world. C) running a government budget surplus. D) None of the above is correct.