A government can overcome the challenge of time consistency only if it is both able and willing to make credible commitments. With this in mind, how might the U.S. laws and procedures for bankruptcy affect the “too big to fail” problem?
Answer to relevant QuestionsIf banks’ fragility arises from the fact that they provide liquidity to depositors, as a bank manager, how might you reduce the fragility of your institution?During the financial crisis of 2007-2009, the Federal Reserve used its emergency authority to lend to nonbank intermediaries. Explain how this extension of the lender of last resort function added to moral hazard.Examine the capital ratios of large banks (FRED code: EQTA5) and small banks (FRED code: EQTA1). What can you say about the risk-taking propensity of these banks over the long run? How did the financial crisis of 2007-2009 ...A central bank should remain vague about the relative importance it places on its various objectives. That way, it has the freedom to choose which objective to follow at any point in time.” Assess this statement in light ...Suppose the government is heavily in debt. Why might it be tempting for the fiscal policymakers to sell additional bonds to the central bank in a move that it knows would be inflationary?
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