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Imagine a scenario where, due to widespread economic anxiety, nearly every household in a country decides to increase its personal savings by cutting back on discretionary spending. While this action is rational for any single household, what is the most likely immediate consequence for the economy as a whole?
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Imagine a scenario where, due to widespread economic anxiety, nearly every household in a country decides to increase its personal savings by cutting back on discretionary spending. While this action is rational for any single household, what is the most likely immediate consequence for the economy as a whole?
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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.