Which theory helps to explain banking panics? A) Asymmetric Information Theory B) Economic Cycle Theory C) Diamond-Dybvig Theory D) Adverse Information Theory
Understand the Problem
The question is asking which theory is most relevant for explaining banking panics, providing multiple-choice options. To solve this, we will analyze the options and identify the one that is best recognized for its relevance to banking crises.
Answer
Diamond-Dybvig Theory
The final answer is C) Diamond-Dybvig Theory
Answer for screen readers
The final answer is C) Diamond-Dybvig Theory
More Information
The Diamond-Dybvig model is a foundational economic theory explaining how banks can become vulnerable to panics due to their role in liquidity transformation—providing liquid claims on illiquid assets. The model elucidates the mechanism of bank runs.
Tips
A common mistake is confusing asymmetric information related theories or other banking crisis models with the Diamond-Dybvig model specifically about bank runs.
