Question 1

__________ describes real increases in debt burdens caused by falling incomes and prices.

Accepted Answer

A) Debt deflation 
B) Debt inflation 
C) Real income depreciation 
D) Real income inflation 
A) Debt deflation 
B) Debt inflation 
C) Real income depreciation 
D) Real income inflation A

Question 2

The risks included in financial intermediation

Accepted Answer

A) can always be successfully managed with prudent lending so that no defaults will occur. 
B) include moral hazard and exchange rate risks. 
C) Are managed by the government 
D) None of the above is correct. 
A) can always be successfully managed with prudent lending so that no defaults will occur. 
B) include moral hazard and exchange rate risks. 
C) Are managed by the government 
D) None of the above is correct. D

Question 3

Financial crises may occur periodically because of which of the following?

Accepted Answer

A) the layering of financial claims 
B) the inherent risks in financial intermediation 
C) the fungibility of funds 
D) All of the above are correct. 
A) the layering of financial claims 
B) the inherent risks in financial intermediation 
C) the fungibility of funds 
D) All of the above are correct. D

Question 4

Which of the following does not help explain why financial crises occur?

Accepted Answer

A) the inherent risk of financial intermediation 
B) the low savings rate in the United States 
C) the layering or interconnectedness of financial claims 
D) sophisticated global electronic funds transfers 
A) the inherent risk of financial intermediation 
B) the low savings rate in the United States 
C) the layering or interconnectedness of financial claims 
D) sophisticated global electronic funds transfers

Question 5

Debt-to-income ratios

Accepted Answer

A) rise over the course of the expansion or recovery. 
B) fall over the course of the expansion or recovery. 
C) fall over the course of the downturn. 
D) Both a and c are correct. 
A) rise over the course of the expansion or recovery. 
B) fall over the course of the expansion or recovery. 
C) fall over the course of the downturn. 
D) Both a and c are correct.

Question 6

Domestic financial assets

Accepted Answer

A) are a part of national wealth. 
B) are not a part of national wealth. 
C) include financial liabilities. 
D) are not a part of national wealth, but include financial liabilities. 
A) are a part of national wealth. 
B) are not a part of national wealth. 
C) include financial liabilities. 
D) are not a part of national wealth, but include financial liabilities.

Question 7

Nominal interest rates are

Accepted Answer

A) approximately equal to real interest rates plus the past year's inflation rate. 
B) approximately equal to real interest rates plus the expected inflation rate. 
C) a reflection of prior real interest rates plus past year's inflation rates. 
D) considered Regulation Q ceiling rates plus the current inflation rate. 
A) approximately equal to real interest rates plus the past year's inflation rate. 
B) approximately equal to real interest rates plus the expected inflation rate. 
C) a reflection of prior real interest rates plus past year's inflation rates. 
D) considered Regulation Q ceiling rates plus the current inflation rate.

Question 8

The economist that developed the financial instability hypothesis is

Accepted Answer

A) Hyman Minsky. 
B) Irving Fisher. 
C) John Maynard Keynes. 
D) Charles Ponzi. 
A) Hyman Minsky. 
B) Irving Fisher. 
C) John Maynard Keynes. 
D) Charles Ponzi.

Question 9

Credit risk is best managed through the prudent use of

Accepted Answer

A) diversification. 
B) expert analysis of potential borrowers and investments. 
C) futures and options to profit from speculation. 
D) Both a and b are correct 
A) diversification. 
B) expert analysis of potential borrowers and investments. 
C) futures and options to profit from speculation. 
D) Both a and b are correct

Question 10

Interest rate risk may be reduced by using which of the following?

Accepted Answer

A) adjustable-rate loans 
B) better credit analysis 
C) nondeposit liabilities 
D) only fixed-rate loans 
A) adjustable-rate loans 
B) better credit analysis 
C) nondeposit liabilities 
D) only fixed-rate loans

Question 11

The financial instability hypothesis attempts to explain

Accepted Answer

A) why a period of prosperity may lead to an eventual collapse. 
B) how the mixture of hedge, speculative, and Ponzi spending units determines the overall health of the economy. 
C) why there is a natural tendency for the economy to experience long term boom-crisis cycles. 
D) All of the above are correct. 
A) why a period of prosperity may lead to an eventual collapse. 
B) how the mixture of hedge, speculative, and Ponzi spending units determines the overall health of the economy. 
C) why there is a natural tendency for the economy to experience long term boom-crisis cycles. 
D) All of the above are correct.

Question 12

Which of the following has not contributed to the growing use of futures and options?

Accepted Answer

A) the increased volatility of foreign exchange rates and interest rates 
B) the globalization of finance 
C) the increase in credit risk 
D) increased price instability 
A) the increased volatility of foreign exchange rates and interest rates 
B) the globalization of finance 
C) the increase in credit risk 
D) increased price instability

Question 13

Why was the deposit interest rate ceiling for S&Ls higher than the ceiling for commercial banks?

Accepted Answer

A) to encourage lending to small businesses 
B) to discourage commercial banks from borrowing short term in order to finance long-term mortgage loans 
C) to encourage savings in S&Ls that could then be used to make mortgage loans 
D) because S&Ls were not as safe as banks 
A) to encourage lending to small businesses 
B) to discourage commercial banks from borrowing short term in order to finance long-term mortgage loans 
C) to encourage savings in S&Ls that could then be used to make mortgage loans 
D) because S&Ls were not as safe as banks

Question 14

A/an __________ is a document that guarantees that a bank will lend an issuer of commercial paper the funds to pay off creditors on the due date if the issuer of the commercial paper cannot.

Accepted Answer

A) standby line of credit 
B) junk bond 
C) unused credit line 
D) derivative 
A) standby line of credit 
B) junk bond 
C) unused credit line 
D) derivative

Question 15

Leveraging

Accepted Answer

A) is the degree to which spending units rely on borrowed funds. 
B) declines of the course of an economic expansion or recovery. 
C) causes problems for the economy only if there is not enough. 
D) is higher for hedge units than Ponzi units. 
A) is the degree to which spending units rely on borrowed funds. 
B) declines of the course of an economic expansion or recovery. 
C) causes problems for the economy only if there is not enough. 
D) is higher for hedge units than Ponzi units.

Question 16

A real increase in debt burdens caused by falling wages and prices is a

Accepted Answer

A) debt inflation. 
B) falling debt-to-income ratio. 
C) debt deflation. 
D) moral hazard. 
A) debt inflation. 
B) falling debt-to-income ratio. 
C) debt deflation. 
D) moral hazard.

Question 17

What problem occurs when FDIC-insured banks make riskier loans than they would if they did not have deposit insurance?

Accepted Answer

A) lower rate of returns 
B) moral hazard 
C) negative cash flows 
D) resource allocation 
A) lower rate of returns 
B) moral hazard 
C) negative cash flows 
D) resource allocation

Question 18

Which of the following is false?

Accepted Answer

A) Because of more aggressive oversight, financial crises will most likely not occur in the future. 
B) A financial crisis can be caused by a recession. 
C) A financial crisis can cause a recession. 
D) A financial crisis is a critical upset in a financial market that leads to falling asset prices and the failure of many financial and nonfinancial firms. 
A) Because of more aggressive oversight, financial crises will most likely not occur in the future. 
B) A financial crisis can be caused by a recession. 
C) A financial crisis can cause a recession. 
D) A financial crisis is a critical upset in a financial market that leads to falling asset prices and the failure of many financial and nonfinancial firms.

Question 19

Which of the following is true with regards to the financial crisis of 2007-2008?

Accepted Answer

A) Although the housing bubble peaked in July 2006, the Fed did not begin to act to mitigate the crisis until late 2007 because it thought the crisis could be contained in the subprime market. 
B) In October 2008, a $700 billion bailout package was signed into law to mitigate the crisis. 
C) The new Obama administration was expected to pass an even bigger bailout package since the economy continued to deteriorate into 2009. 
D) All of the above are true. 
A) Although the housing bubble peaked in July 2006, the Fed did not begin to act to mitigate the crisis until late 2007 because it thought the crisis could be contained in the subprime market. 
B) In October 2008, a $700 billion bailout package was signed into law to mitigate the crisis. 
C) The new Obama administration was expected to pass an even bigger bailout package since the economy continued to deteriorate into 2009. 
D) All of the above are true.

Question 20

A subprime loan is

Accepted Answer

A) a mortgage to some one with bad credit and little or no down payment. 
B) the lowest rated fixed rate mortgage. 
C) is made to a borrower with good credit where the lender does not verify the income stated by the borrower. 
D) a derivative. 
A) a mortgage to some one with bad credit and little or no down payment. 
B) the lowest rated fixed rate mortgage. 
C) is made to a borrower with good credit where the lender does not verify the income stated by the borrower. 
D) a derivative.

Exam 11: Financial Instability and Strains on the Financial System

__________ describes real increases in debt burdens caused by falling incomes and prices.

The risks included in financial intermediation

Financial crises may occur periodically because of which of the following?

Which of the following does not help explain why financial crises occur?

Debt-to-income ratios

Domestic financial assets

Nominal interest rates are

The economist that developed the financial instability hypothesis is

Credit risk is best managed through the prudent use of

Interest rate risk may be reduced by using which of the following?

The financial instability hypothesis attempts to explain

Which of the following has not contributed to the growing use of futures and options?

Why was the deposit interest rate ceiling for S&Ls higher than the ceiling for commercial banks?

A/an __________ is a document that guarantees that a bank will lend an issuer of commercial paper the funds to pay off creditors on the due date if the issuer of the commercial paper cannot.

Leveraging

A real increase in debt burdens caused by falling wages and prices is a

What problem occurs when FDIC-insured banks make riskier loans than they would if they did not have deposit insurance?

Which of the following is false?

Which of the following is true with regards to the financial crisis of 2007-2008?

A subprime loan is

Introduction and Overview

Money and Its Role in the Economy

The Overseer: the Federal Reserve System

Financial Markets, Instruments, and Market Makers

Interest Rates and Bond Prices

The Structure of Interest Rates

Market Efficiency and the Flow of Funds Among Sectors

An Introduction to Financial Intermediaries and Risk

Commercial Banking Structure, Regulation, and Performance

Financial Innovation

Regulation of the Banking System and the Financial Services Industry

The Debt Markets

The Stock Market

Securities Firms, Mutual Funds, and Financial Conglomerates

How Exchange Rates Are Determined

Forward, Futures, and Options Agreements

The International Financial System

The Fed, Depository Institutions, and the Money Supply Process

The Demand for Real Money Balances and Market Equilibrium

Financial Aspects of the Household, Business, Government, and Rest-Of-The-World Sectors

Aggregate Demand and Aggregate Supply

The Challenges of Monetary Policy

The Process of Monetary Policy Formation

Policy Implementation

Monetary Policy in a Globalized Financial System

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