Why Was the Fed Reluctant to Rescue Insolvent Banks

question 50

Multiple Choice

Why was the Fed reluctant to rescue insolvent banks?

• A) It thought it may lead to moral hazard.
• B) It thought it may lead to adverse selection.
• C) It thought they were still liquid.
• D) It did not think they were insolvent.

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Definitions:

Break-Even Level

The point at which total revenues equal total expenses, and the business neither makes a profit nor incurs a loss.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Variable Cost

A cost that changes in proportion to the level of production or business activity.

Contribution Margin Ratio

The percentage of each sale that contributes to covering fixed costs after variable costs have been paid.