In 2008,the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing.Which of the following is one reason why these measures were taken?
A)The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed.
B)The bankruptcy of a large financial firm would force the firm to sell its holdings of securities,which could cause other firms that hold these securities to also fail.
C)The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt.
D)The failure of these firms would have forced the Fed to increase interest rates,which could have led to a severe recession.

Question

Quizplus · Accepted Answer

If a large financial firm were to declare bankruptcy, it would have to sell off its holdings of securities. This would flood the market with securities, which would lead to a decrease in their value. As a result, other firms that hold these securities would also face losses, which could lead to their failure. This domino effect could put the entire financial system at risk, leading to a severe economic downturn. Therefore, the government took action to prevent the failure of these firms to avoid such a scenario.

In 2008,the Treasury and Federal Reserve Took Action to Save