The best way for a government to stop the failure of one bank from turning into a bank panic is to:
A) make sure solvent institutions can meet the withdrawal demands of depositors.
B) declare a bank holiday until solvent banks can acquire adequate liquidity.
C) limit the withdrawals of depositors.
D) provide zero-interest rate loans to all banks regardless of net worth.

Question

Quizplus · Accepted Answer

Making sure that solvent institutions can meet the withdrawal demands of depositors provides reassurance to the public that their funds are safe and that there is no need to panic and withdraw all their money from all banks. This helps to prevent the failure of one bank from turning into a bank panic. Declaring a bank holiday or limiting withdrawals can also help to prevent a bank panic, but they may not be as effective as ensuring that solvent institutions have adequate liquidity. Providing zero-interest rate loans to all banks regardless of net worth may not be effective in preventing a bank panic and may even worsen the problem by creating a moral hazard.

The Best Way for a Government to Stop the Failure