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ECON 351 (21)
Chapter 12

Chapter 12_Financial Crises Regulation.docx

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Department
Economics
Course
ECON 351
Professor
Frank Sorokach
Semester
Fall

Description
Chapter 12: Financial Crises and Financial Regulations  The Underlying Fragility of Commercial Banking - Illiquid – banks are illiquid due to depositors can demand their money back at any time while banks may have difficulty selling the loans in which they invested depositors’money - Liquidity Risk – they can have difficulty meeting their depositors’demands to withdraw their money - Insolvent – a situation for a bank or other firm whose assets have less value than its liabilities, so its net worth is negative  Two main ways to avoid bank panics by Government: 1. Acentral bank can act as a lender of last resort 2. The government can insure deposits  Exchange Rate Crises - Countries have attempted to keep the value of their currency fixed by pegging it against another currency  Sovereign Debt Crises - when a country has difficulty making interest or principal payments on its bonds - Sovereign debt crises result from either of two circumstances: 1. Chronic government budget deficits and interest payments taking up an unsustainably large fraction of government spending 2. Asevere recession that increases government spending and reduces tax revenues, resulting in soaring budget deficits  The Great Depression - Stock prices plunged, thereby reducing household wealth, making it more difficult for firms to raise funds, and increasing uncertainty. Higher uncertainty leads to decreases in spending. - In 1930, Congress passed the Smoot-Hawley TariffAct, which led to retaliatory increases in foreign tariffs, thereby r
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