Question

2. Discuss the potential effects of bank failure on the monetary system, and the macro-economy. How does it tend to be contagious and what are the broader concerns? Explain how government policy, both in the form of regulation of the monetary system, and in the form of bailouts (too big to fail), may have caused and/or remedied the problems. Incorporate into your response, a discussion of ethics and incentives, and compare to our discussion about unemployment insurance from Week 2’s reading and discussion

please refer from the textbook MACROECONOMICS by N Gregory Mankiw

Answer 1

Potential effects of bank failure :-

1) The banks will no longer be able to meet their obligations .

2) The banks might lose too much of investment.

3) The bank will be unable to pay to its depositors creating money supply crisis .

4) Shrink of liquid assets of bank .

5) Sale of the bank to a more solvent bank .

Analysis of monetary system and bailouts :-

1) The Central Bank will inject money supply into the banks in order to restore it's shrinking financial assets .

2) The bailouts is designed to prevent complete collapse of the failing bank where the government injects money into the capital of banks so that they can work properly.

3) Another system is the system of bail in where the bank uses the money of its unsecured creditors to restructure it's capital .

Role of ethics and incentives and unemployment insurance :-

The way that unemployment insurance is designed does not work in today's society .

Part time workers , independent contractors are unable to access the benefits , while there are not many full time jobs available .

Thus non traditional options are the only way to get back into workforce which limits the access of the workers to take benefit of unemployment insurance.