In practice, during a financial crisis, the Fed and other central banks are under pressure to adopt an "extend and pretend" policy, in order to contain the wave bankruptcies. "Extend and pretend" refers to extending loans

Multiple Choice

• only to financial firms that are solvent, as long as the firms could pledge enough assets.
• to financial firms, both solvent and insolvent, as long as the firms could pledge enough assets.
• to financial firms in need of liquidity, regardless of whether the firms pledge enough assets or not.
• to firms and then pretending that the loans are being repaid when they become due.