The Diamond-Dybvig Model

question 11

Multiple Choice

The Diamond-Dybvig model

• A)shows why illiquid assets are useful.
• B)illustrates the role of moral hazard in banking.
• C)shows how monetary policy can prevent banking crises.
• D)shows that Keynesian fiscal policy is effective.
• E)demonstrates how the banking system can be unstable.

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Definitions:

Inflation Level

The speed at which average prices for products and services increase, leading to a decrease in buying power.

Base Year

A specific year against which economic growth or other financial figures are measured and compared.

Paasche Index

An index used to measure price level changes over time by comparing the current price of a basket of goods to its price in a base year, weighting the current period quantities.

Current-Year Prices

Prices of goods and services measured during the same year of analysis, not adjusted for inflation.