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