1. Many economists argue that the rescue of a nancial institution should protect the institu- tion's creditors from losses but not protect its owners: they should lose their equity. Sup- porters of this idea say it reduces the moral hazard created by rescues. a. Explain howr this approach reduces moral hazard compared to a rescue that protects both creditors and equity holders. b. Does this approach eliminate the moral hazard problem completely? Explain. 2. What could U.S. policymakers have done to prevent the Great Depression or at least to reduce its severity? Specically: a. What government or Fed policies might have prevented the stock market crash and bank panics that started the nancial crisis? (Hint:Think of policies that exist today.) b. Once the crisis began, what could policy- makers have done to dampen the effects on the nancial system and economy? Explain. 3. Some Congress members think the govern- ment should not risk taxpayer money to rescue financial firms whose highly paid exec- utives have behaved irresponsibly. Instead, the International Monetary Fund (IMF), p. 584 Lender of last resort, p. 556 Liquidity trap, p. 573 Too big to fail (TBTF), p. 558 government should aid middle- and low- income people hurt by the nancial crisis, such as homeowners facing foreclosure. Discuss the arguments for this position and against it. 4. In 2010, Senator Blanche Lincoln (D-Arkansas) proposed that commercial banks be forbid- den to trade derivative securities. Discuss the arguments for and against this proposal. 5. 0f the proposed fmanciai reforms discussed in Section 18.4, which would have signicantly dampened the financial crisis of 20072009 if they had been in place before the crisis? Could any of the reforms have prevented the crisis entirely? Explain