Question

Macroeconomics Econ 231 Banking assignment . Answer the following questions and attach for submission. Make sure to give full and complete answers with support. Explanations should be a minimum of 5 - 6 sentences each.

Why is consumer confidence in banks important to the growth of an economy? What are the short - term and long - term consequences of society not maintain banking accounts?

Answer 1

An economy needs to have a good savings rate that banks can, in turn, lend to firms. The firms then invest the same into productive purposes thereby contributing to capital formation in the country. Capital formation of different kinds, for example, the building of new roads spurs economic activity and provides backward and forward linkages like employment opportunities. Hence, only when people have confidence in banks that their savings will be protected and available as and when required, will they deposit their money.

In short-term a run on the bank can cause serious consequences. A run on one bank can quickly diminish confidence towards other banks also. People will take out money from their accounts and hold more cash. Holding more cash will lead to higher demand for products and cause inflation.

In the long term, the capital formation will decline and lead the economy to be unproductive. It can translate into lower economic growth, higher unemployment, social and political uncertainty. It is only on the availability of long-term credit that firms would be able to invest in projects which have higher gestation periods like railways.