Briefly describe the combination of strategies used by government officials to protect investors and ensure the stability of the financial system.
What will be an ideal response?
Government officials employ a combination of strategies to protect investors and ensure the stability of the financial system. First, they provide the safety net to insure banks that face sudden deposit outflows. This consists of operating as the lender of last resort and the provider of deposit insurance. However, this safety net can result in moral hazard (bank managers have an incentive to take on too much risk), therefore the government must also engage in regulation and supervision.
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Why did the United States abandon the gold standard in the 1930s?
A) The government wanted to move away from a floating exchange rate system to a fixed exchange rate system. B) The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins. C) The government wanted to rapidly expand the money supply in response to the Great Depression. D) New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.
Refer to Figure 4-6. What area represents the deadweight loss at P2?
A) G + H B) C + E C) B + C D) C + E + H