What problem is addressed by a government safety net for the ...

[EY67]

What problem is addressed by a government safety net for the banking system? What problem is caused by the safety net?
 
  What will be an ideal response?

Question 2

Credibility is not important in ________.
 
  A) new Keynesian and traditional Keynesian theory
  B) real business cycle and traditional Keynesian theory
  C) real business cycle and new Keynesian theory
  D) traditional Keynesian, new Keynesian and real business cycle theory

[FergA]

Answer to Question 1

The safety net protects good banks from being abandoned by uninformed depositors, so banks can continue to channel funds. The safety net means that bad banks need not worry that depositors will become aware of or care about risky practices, so the incentive to remain prudent is weakened (moral hazard).

Answer to Question 2

B