SUMMER TERM EXAMINATIONS 2019
ECON0001: ECONOMICS OF FINANCIAL MARKETS
Time allowance: 2 hours. Answer one question from Part A and three questions from Part B. Each question carries 25 percent of the total mark. Please,
explain your answers. A numerical answer without explanation will not give
you full credit.
In cases where a student answers more questions than requested by the examination rubric, the policy of the Economics Department is that the studentís
rst set of answers up to the required number will be the ones that count (not
the best answers). All remaining answers will be ignored.
Part A
Question A.1
Illustrate the di§erent theories of banking crises. Discuss which policies can
prevent bank runs. Is there a sense in which the possibility of bank runs may
have bene ts
Question A.2
Illustrate the main characteristics of the nancial system in the United
States.
Part B
Question B.1
In our economy there are three dates t = 0; 1; 2 and a single, all-purpose
good at each date. There is a continuum of ex-ante identical agents of measure
1. Each has an endowment of one unit of the good at time t = 0 and nothing at
dates t = 1; 2. There are two assets, a short asset and a long asset. The short
asset produces one unit of the good at date t + 1 for every unit invested at date
t = 0; 1. The long asset produces R = 4 units of the good at date 2 for every
unit invested at date 0. If instead it is liquidated at date 1, it produces r = 1.
At date 0 each agent is uncertain about his preferences over the timing of
consumption. With probability _x005f = 1=2 he expects to be an early consumer,
who only values consumption at date 1. With the complementary probability
(1 = 1=2) he expects to be a late consumer, who only values consumption at
date 2. Let c1 denote the amount consumed at date 1 by an early consumer and
c2 denote the amount consumed by a late consumer at date 2. Note that the
consumer consumes either c1 or c2 but not both. Moreover, he never consumes at
date 0. Each agent has preferences represented by a Von Neumann-Morgenstern
utility function, with
u(c) = c
