Question 1

Which government action involves putting taxpayer money at risk?

Accepted Answer

A)  lowering interest rates 
B)  bailout 
C)  lender of last resort 
D)  none of the above 
A)  lowering interest rates 
B)  bailout 
C)  lender of last resort 
D)  none of the above B

Question 2

What are the costs and benefits in the way the government dealt with Lehman Brothers during the financial crisis in 2008?

Accepted Answer

By letting Lehman fail, the government increased uncertainty and added to the financial panic. In the future, financial institutions may not be certain of being bailed out, which helps minimize moral hazard problems.

Question 3

Was the Black Friday stock market crash in 1987 a systemic crisis? Why or why not?

Accepted Answer

It was not a systemic crisis since the problems did not extend to the rest of the economy.

Question 4

The way the government dealt with which of these institutions may have mitigated the asymmetric information problem between regulators and financial firms?

Accepted Answer

A)  AIG 
B)  Fannie Mae 
C)  Lehman Brothers 
D)  none of the above 
A)  AIG 
B)  Fannie Mae 
C)  Lehman Brothers 
D)  none of the above

Question 5

MBS stands for mortgage backed securities.

Accepted Answer

A) True 
 B)False

Question 6

Which government action is usually tried first in a financial crisis?

Accepted Answer

A)  changing the reserve requirement 
B)  bailout 
C)  lender of last resort 
D)  none of the above 
A)  changing the reserve requirement 
B)  bailout 
C)  lender of last resort 
D)  none of the above

Question 7

The collapse of the housing bubbles ends when all homeowners are "under water."

Accepted Answer

A) True 
 B)False

Question 8

How do short term interest rates act during a financial panic? Why?

Accepted Answer

Interest rates tend

Question 9

Only a leveraged investor can end up with negative equity when a stock market bubble bursts.

Accepted Answer

A) True 
 B)False

Question 10

In Islamic insurance, or takaful, participants contribute to a common fund, and settlements are settled from that fund.

Accepted Answer

A) True 
 B)False

Question 11

During the 2007-2009 financial crisis, the government acted as a lender of last resort but did not use bailouts.

Accepted Answer

A) True 
 B)False

Question 12

An investor borrows 20% of the funds to buy a stock at a price of $100. If the price falls to 50, his or her effective rate of return is

Accepted Answer

A)  -20% + borrowing costs. 
B)  -50% + borrowing costs. 
C)  -62.5% + borrowing costs. 
D)  -66.6% + borrowing costs. 
A)  -20% + borrowing costs. 
B)  -50% + borrowing costs. 
C)  -62.5% + borrowing costs. 
D)  -66.6% + borrowing costs.

Question 13

Higher leverage can protect investors against large losses when asset prices fall.

Accepted Answer

A) True 
 B)False

Question 14

A stock market bubble can start due to

Accepted Answer

A)  low interest rates. 
B)  high expected dividends. 
C)  high levels of lending. 
D)  all of the above. 
A)  low interest rates. 
B)  high expected dividends. 
C)  high levels of lending. 
D)  all of the above.

Question 15

The housing bubble leading up to the financial crisis of 2007-2009 was exacerbated by

Accepted Answer

A)  rising mortgage rates. 
B)  Treasury Department purchase of CDOs. 
C)  NINJA loans. 
D)  all of the above. 
A)  rising mortgage rates. 
B)  Treasury Department purchase of CDOs. 
C)  NINJA loans. 
D)  all of the above.

Question 16

Lenders of last resort intend to

Accepted Answer

A)  add liquidity to financial markets. 
B)  restore confidence in financial markets. 
C)  lower interest rates. 
D)  all of the above. 
A)  add liquidity to financial markets. 
B)  restore confidence in financial markets. 
C)  lower interest rates. 
D)  all of the above.

Question 17

What classifies a financial instrument as halal?

Accepted Answer

To be considered halal, Muslim

Question 18

Some would argue that the government should not engage in most bailouts due to moral hazard. Explain their reasoning and the nature of the asymmetric information problem.

Accepted Answer

If financial firms know they w

Question 19

The Federal Reserve is the most common lender of last resort.

Accepted Answer

A) True 
 B)False

Question 20

A technological advance can lead to an increase in stock prices primarily through

Accepted Answer

A)  lower interest rates. 
B)  higher expected earnings. 
C)  higher levels of lending. 
D)  none of the above. 
A)  lower interest rates. 
B)  higher expected earnings. 
C)  higher levels of lending. 
D)  none of the above.

Exam 13: Financial Crises: Causes and Consequences

Which government action involves putting taxpayer money at risk?

What are the costs and benefits in the way the government dealt with Lehman Brothers during the financial crisis in 2008?

Was the Black Friday stock market crash in 1987 a systemic crisis? Why or why not?

The way the government dealt with which of these institutions may have mitigated the asymmetric information problem between regulators and financial firms?

MBS stands for mortgage backed securities.

Which government action is usually tried first in a financial crisis?

The collapse of the housing bubbles ends when all homeowners are "under water."

How do short term interest rates act during a financial panic? Why?

Only a leveraged investor can end up with negative equity when a stock market bubble bursts.

In Islamic insurance, or takaful, participants contribute to a common fund, and settlements are settled from that fund.

During the 2007-2009 financial crisis, the government acted as a lender of last resort but did not use bailouts.

An investor borrows 20% of the funds to buy a stock at a price of $100. If the price falls to 50, his or her effective rate of return is

Higher leverage can protect investors against large losses when asset prices fall.

A stock market bubble can start due to

The housing bubble leading up to the financial crisis of 2007-2009 was exacerbated by

Lenders of last resort intend to

What classifies a financial instrument as halal?

Some would argue that the government should not engage in most bailouts due to moral hazard. Explain their reasoning and the nature of the asymmetric information problem.

The Federal Reserve is the most common lender of last resort.

A technological advance can lead to an increase in stock prices primarily through

The Financial System

Money

Interest Rates

The Economics of Interest-Rate Fluctuations

The Economics of Interest-Rate Spreads and Yield Curves

Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

Financial Structure, Transaction Costs, and Asymmetric Information

Bank Management

Innovation and Structure in Banking and Finance

The Economics of Financial Regulation

Financial Derivatives

Central Bank Form and Function

The Money Supply Process and the Money Multipliers

Monetary Policy Tools

Monetary Policy Targets and Goals

Foreign Exchange

International Monetary Regimes

Money Demand

Is-Lm

Is-Lm in Action

Aggregate Supply and Demand and the Growth Diamond

Monetary Policy Transmission Mechanisms

Inflation and Money

Rational Expectations Redux: Monetary Policy Implications

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