Explanation

Statement 1 Analysis:

• The special spread is actually the difference between the general collateral rate and the special collateral rate, not between the federal funds rate and general collateral rate.
• The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.
• The general collateral rate applies to standard, non-special securities used as collateral in repo transactions.
• Therefore, Statement 1 is incorrect.

Statement 2 Analysis:

• During financial crises, there is typically a "flight to quality" where investors seek safer assets.
• This increased demand for high-quality collateral (general collateral) drives down the general collateral rate.
• Meanwhile, the federal funds rate is set by central bank policy and may not decrease as much.
• This causes the spread between the federal funds rate and general collateral rate to widen.
• Therefore, Statement 2 is correct.

Conclusion: Only Statement 2 is accurate, making Option C the correct answer.