The Fed's lender-of-last-resort function
A)has proven to be ineffective.
B)cannot prevent runs by large depositors.
C)is no longer necessary due to FDIC insurance.
D)creates a moral hazard problem.

Question

Quizplus · Accepted Answer

The Fed's lender-of-last-resort function creates a moral hazard problem because it incentivizes banks to take on riskier investments knowing that they have a safety net in case of failure. This can lead to excessive risk taking and ultimately, financial instability.

The Fed's Lender-Of-Last-Resort Function