The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but in the other hand the Fed must:a. Control the money supplyb. Ensure the employment of people in financial servicesc. Promote competition among banksd. Protect the stability of the banking system

Question

Max Foley

Social Studies

2 May, 01:46

The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but in the other hand the Fed must:a. Control the money supplyb. Ensure the employment of people in financial servicesc. Promote competition among banksd. Protect the stability of the banking system

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Answers (1)

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Justin Rivera · Answer 1

d. Protect the stability of the banking system

Explanation:

The moral hazard of "too big to fail" policy can be considered an incentive for big banks to act risky, since historically the government has not let similar banks go extinct. On the other hand, this government conduct aims to maintain the stability of the financial system. This is because these large banks have a large representation in the credit market, so that if there is bankruptcy, there will be losses for many account holders and this will affect the financial system as a whole, which could collapse with the collapse of a large bank.