Some developing countries have suffered banking crises in which depositors lost part or all of their deposits (in some countries there is no deposit insurance). This type of crisis decreases depositors’ confidence in the banking system. What would be the effect of a rumor about a banking crisis on checkable deposits in such a country? What would be the effect of on reserves and the monetary base?
Keeping up depositors’ confidence is very critical in the banking sector because, it is the depositors who make money available to the banking sector. The rest of the answer is discussed in detail.Download Full Solution