During a financial crisis, the Fed and other central banks often adopt an extend and pretend...

Transcribed Image Text:

During a financial crisis, the Fed and other central banks often adopt an "extend and pretend" policy in their emergency lending activities. Which of the following is not a consequence of this policy? a. It enhances the moral-hazard problem going forward; banks will be more likely to engage in risky behavior. b. It increases the chances of the Fed itself (or another central bank) being dragged into its own bankruptcy crisis. c. It limits the potential for insolvent banks to drag down the solvent ones as well. d. It allows many poorly managed firms that have become insolvent due to making bad investments to avoid well-deserved bankruptcies. During a financial crisis, the Fed and other central banks often adopt an "extend and pretend" policy in their emergency lending activities. Which of the following is not a consequence of this policy? a. It enhances the moral-hazard problem going forward; banks will be more likely to engage in risky behavior. b. It increases the chances of the Fed itself (or another central bank) being dragged into its own bankruptcy crisis. c. It limits the potential for insolvent banks to drag down the solvent ones as well. d. It allows many poorly managed firms that have become insolvent due to making bad investments to avoid well-deserved bankruptcies.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below b It increases the chances of the Fed i... View the full answer