The biggest flaw of the regulatory structure put in place during the Great Depression was in
A)not recognizing the sequence of events that would occur if market interest rates increased and remained above Regulation Q ceilings for a significant time period.
B)not recognizing what would happen if bank runs failed to stop.
C)not recognizing the incentive effects deposit insurance created.
D)not recognizing the sequence of events that would occur if market interest rates fell and remained below Regulation Q ceilings for a significant time period.

Question

Quizplus · Accepted Answer

The regulatory structure put in place during the Great Depression, including the use of Regulation Q to set ceilings on interest rates banks could pay depositors, did not anticipate the possibility of market interest rates remaining above these ceilings for a significant time period. As a result, banks faced a squeeze on their profits and were unable to attract deposits, leading to the failure of many institutions.

The Biggest Flaw of the Regulatory Structure Put in Place