Traditionally, the Federal Reserve can give emergency loans only to

Figure 10.7 A Reduction in the Proportional Tax Rate

What will be an ideal response?

More borrowing by firms in the domestic currency is one way to reduce currency mismatch. What would be the major issue if government insured repayment of the loans at a low cost?

A) There would be lots of new borrowing, and the production sector might not be able to keep pace. B) It would be too expensive. C) There could be a moral hazard problem with excessive risk taking. D) It is likely that no new borrowing would take place—firms need the incentive of tax breaks.