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DB6 Please read the Focus section (page 120) entitled Bank Runs, discuss and summarize the main ideas in at least two paragraphs.
Bank runs are a condition where banks close down after depositors or liquidity providers withdraw their deposits. Let take an instance where there is a healthy bank. A bank that has a history of giving good loans. A rumor or speculation is made that this healthy bank is about to collapse. This will instill fear in depositors who are afraid of losing their money and as a result, they go to the bank to withdraw their deposit and close the account. The bank Spends their deposit to give out loans that cannot be asked back so fast and the assets cannot sell immediately, the bank will be fixed to close. This is what is referred to as banks run, a situation that affects several banks as well as other lending institutions a situation that has characterized most banks in America before 1930.
Several measures have been put in place to control this incident of bank runs. The first solution is called narrowing down. This is a condition where banks are restricted from holding liquid and safe government bonds like T-bills and ensuring that loans are done by financial intermediaries other than banks. However, despite the ability of narrow baking to eliminate runs on banks, experts warn of the situation changing to shadow baking thus causing runs on these intermediaries as well. Practically running on banks in the United States has been approached in two stages. One is limiting the banks to ensure that a bank run doesn’t happen, for instance by the provision of federal deposit insurance, which provides a limit at which banks should take a deposit and covers them. This on the other hand gives banks the freedom to borrow from other sources which would still lead to running on the banks in the event the wholesale funders demand their money.DB7 After reading and studying chapter 7, please discuss the following questions in at least two paragraphs each:1) On pages (144- 145) read the "FOCUS" section entitled Henry Ford and Efficiency Wages. In light of that reading, discuss and explain the efficiency wages theory.
According to the above excerpt, Henley Ford decided to increase the wages of his ford company employees from less than 3 dollars to 5dollars a day, which was relatively way higher than the market wage rates. The effects of this were increased rate of employee retention, increased productivity, and reduced absenteeism. The excerpt explains that this is an ideal illustration of the practical application of efficiency wage theory. Before the announcement by Henly, this discussion statistically shows that the rate of monthly turnover was at 31% translating to a whopping 370% annually. This implies that 31% of employees used to leave employment every month( Daniel, Lawrence, 1987). Similarly, before the announcement, the layoff rate was at 67% which implies that out of a hundred employees, 67 were played off every year. After the announcement, both the turnover and layoff rates collapsed down to 16% and less than 1% respectively. These marginal reductions of both turnover and layoff rates as well as improved productivity is what explains...