205.4 Lesson - bankRun

Screen: bankRun

Headline: Problems of Fractional Reserve Banking

Reward: 2

Text: Banks sometimes issued more paper notes than they had deposits, which could cause problems in the economy. If people started to doubt the solvency of a bank, they might rush to withdraw their money all at once before others do. This is called a bank run.

The sudden loss of deposits from the bank run could reveal that the bank was using too much leverage through Fractional Reserve Banking. This could cause a lack of liquidity and bring the whole financial system to a stop.

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QUIZ

Question: What is a potential outcome of banks issuing more paper notes than they held deposits?

Answer: A sudden drain of deposits en masse, leading to systemic fears and drying up of liquidity

Feedback: masse, leading to systemic fears and drying up of liquidity

Correct: true

Answer: A nice vacation for everyone

Feedback: Sorry, taking a vacation isn't quite the outcome we're looking for here. Better luck next time

Correct: false

Answer: A sudden increase in the price of gasoline

Feedback: Gas prices might fluctuate for a variety of reasons, but this particular scenario doesn't have much to do with it. Try again!

Correct: false