If the government guarantees liabilities of financial institutions other than deposits:
A)those financial institutions will have the incentive to engage in overly risky behavior.
B)those financial institutions will have the incentive to engage in less risky behavior.
C)the Federal Reserve will be forced to raise reserve requirements.
D)the economy will be pushed close to the zero bound on interest rates.

Question

Quizplus · Accepted Answer

If the government guarantees liabilities of financial institutions other than deposits, those financial institutions will have the incentive to engage in overly risky behavior because they will have less to lose if they fail. This can lead to financial instability and ultimately harm the overall economy.

If the Government Guarantees Liabilities of Financial Institutions Other Than