Montary Policy #1

Deposit insurance guarantees that:

depositors will get their deposits back, even if the bank is insolvent.

An insolvent institution has:

liabilities that exceed its assets.

Which of the following did NOT happen during the 2008-09 financial crisis?

The Fed quickly raised interest rates to stop the flow of easy credit.

The Fed acts as lender of last resort:

when deposit insurance isn't enough or when an institution isn't covered by deposit insurance.

An illiquid asset is one that is _______ but _______.

worth a lot in the future; can only be sold today at a low price

The Fed may also lend to insolvent banks, rather than winding them down, in order to:

address the problem of systemic risk.

High-value, long-term projects benefit from:

long-term relationships between lenders and borrowers.

The problem of moral hazard exists when:

people or institutions who are insured tend to take on too much risk.

Traditionally, the Fed lends to:

solvent but illiquid banks.

Banking panics are especially dangerous because:

they can start easily and spread quickly