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Chapter 14: Q12. (page 301)

What is TARP and how was it funded? What is meant by the term 鈥渓ender of last resort,鈥� and how does it relate to the financial crisis of 2007鈥�2008?

Short Answer

Expert verified

The TARP or trouble asset relief program is the government-funded treasury bailout. The lender of last resort is the provider of money in case of a crisis or emergency where no other way is available. This lender of last resort is a function of the Federal Reserve, which it successfully performed to bring the economy out of the financial crises of 2007-2008.

Step by step solution

01

Step 1. The treasury bailout

The trouble asset relief program, or TARP, was passed in 2008 by Congress, which allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial firms. The Trap saved many financial institutions from bankruptcy, which would have brought down the entire banking system within and frozen the credit in the economy if they were fallen.

02

Step 2. The lender of last resort

The Federal Reserves become the lender of last resort for the financial institutions and lend them in major financial emergencies. The 2007-2008 financial crisis was one of the biggest financial emergencies wherein the Fed raised around 1903 trillion dollars, successfully disposing of its function.

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Most popular questions from this chapter

Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to 0.50, what is the value of the dollar?

Assume that Jimmy Cash has \(2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw \)200 of cash from the bank鈥檚 ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

Explain and evaluate the following statements:

a. The invention of money is one of the great achievements of humanity, for without it the enrichment that comes from broadening trade would have been impossible.

b. Money is whatever society says it is.

c. In the United States, the debts of government and commercial banks are used as money.

d. People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services.

e. When the price of everything goes up, it is not because everything is worth more but because the currency is worth less.

f. Any central bank can create money; the trick is to create enough, but not too much, of it.

What do economists mean when they say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers鈥� banks?

Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?

a. Federal Reserve System

b. the 12 Federal Reserve Banks

c. Board of Governors of the Federal Reserve System

d. Federal Open Market Committee (FOMC)
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