Question

Now, suppose that an economist from a university in Arizona asserts that a government bailout of severely distressed financial firms is necessary to avoid a deep recession, while another economist from a school of industrial relations asserts that a government bailout of severely distressed financial firms will create an environment that will require more bailouts. Which of the following does the economist from the university in Arizona probably believe?A. Bailouts create an ideal economic environment.B. The financial firms are too big to fail.C. A bailout will encourage the financial firms to take more risks.

Answer 1

The answer is: B) The financial firms are too big to fail.

Step-by-step explanation:

President George W. Bush thought this way when he approved the bailouts of several banks which he considered TOO BIG TO FAIL. It simply means that since financial firms are so deeply mingled together, if more big banks continue to go bankrupt, the whole financial system would collapse. That would only lead to a deeper recession.

President Barack Obama used the same logic when he bailed out General Motors and Chrysler. He thought that if those car companies stopped working, then a major portion of the country's whole manufacturing system would collapse.