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During a period of economic uncertainty, it is a rational decision for an individual depositor to withdraw their funds from a bank they fear might become insolvent. Therefore, if all depositors act on this same rational fear and withdraw their funds, the overall financial system will become more stable as weaker banks are eliminated.
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During a period of economic uncertainty, it is a rational decision for an individual depositor to withdraw their funds from a bank they fear might become insolvent. Therefore, if all depositors act on this same rational fear and withdraw their funds, the overall financial system will become more stable as weaker banks are eliminated.