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Give reasons why governments bail out banks during an economic crisis
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Solved in 2 steps
- Based on the functions of the banking system, give reasons why governments bail out banks during an economic crisis?Explain how a financial crisis typically occurs. What are the stages of a financial crisis? Why should governments try to avoid financial crises?The central bank intervened heavily in the credit crisis. Explain whether you believe the central bank’s intervention improved conditions in financial markets or made conditions worse.
- When any central bank wanted to increase the money supply and loosen credit conditions, what would it do in the private market for government bonds? Explain how this is supposed to affect the economy.Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase with the interest rate? A. States tend to increase franchise fees on banks as interest rates rise B. Reserve requirements increase as interest rates rise C. Banks earn more money as interest rates increase, so their federal income taxes increase. D. Banks could earn more money if they could lend the funds required to be held as reserves.Central Banks are in fact not at fault when it comes to turning economy into recession and increasing inflation. Explain in detail,
- Explain the Currency crisis, Banking Crisis and Foreign Debt CrisisFinancial Crises have Adverse effects on the Economies. Write a Comprehensive Note on the causes and consequences of Financial CrisesReserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase as interest rates rise? A. As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises. B. States tend to increase franchise fees on banks as interest rates rise C. The Fed always increases the reserve requirement as interest rates rise D. Banks earn more money as interest rates increase, so their state and federal income taxes increase.
- Discuss how banks benefit when interest rates decrease?With no government regulation, how much bank capitals would banks hold? A. Too much capital, reducing the profitability of banks. B. Too much capital, making it more difficult to obtain loans. C. Too little capital, reducing the profitability of banks. D. Too little capital, making it more likely to fail.What are the possible arguments for setting up a firewall between investment banks and commercial banks? Do you think a firewall between investment banks and commercial banks can prevent a financial crisis like the subprime loan crisis? Elaborate your answers