Question 1

Disintermediation occurred in the S&L industry

Accepted Answer

A) when funds were transferred from commercial paper markets into S&L deposits. 
B) when funds were withdrawn from S&Ls and reinvested directly in the open market. 
C) because the Fed raised Regulation Q ceilings. 
D) because sharply falling interest rates led depositors to abandon the low returns paid on S&L deposits. 
A) when funds were transferred from commercial paper markets into S&L deposits. 
B) when funds were withdrawn from S&Ls and reinvested directly in the open market. 
C) because the Fed raised Regulation Q ceilings. 
D) because sharply falling interest rates led depositors to abandon the low returns paid on S&L deposits.

Question 2

Which of the following terms best describes the U.S. Savings and Loan industry during the 1980s?

Accepted Answer

A) expanding 
B) strained and failing 
C) healthy and stable 
D) overburdened by excessive regulations 
A) expanding 
B) strained and failing 
C) healthy and stable 
D) overburdened by excessive regulations

Question 3

According to the financial instability hypothesis, when government intervenes to break a downturn

Accepted Answer

A) The economy returns to a financially stable position. 
B) Spending units do not reduce their leveraging and the economy remains financially fragile. 
C) the knowledge that the government will do so may create banks to take on more risks. 
D) Both b and c are correct. 
A) The economy returns to a financially stable position. 
B) Spending units do not reduce their leveraging and the economy remains financially fragile. 
C) the knowledge that the government will do so may create banks to take on more risks. 
D) Both b and c are correct.

Question 4

Which of the following did not contribute to the 1980s Savings and Loan crisis?

Accepted Answer

A) expanded lending powers of the S&Ls 
B) higher capital requirements 
C) hesitation on the part of regulators and legislators 
D) the falling value of S&L assets 
A) expanded lending powers of the S&Ls 
B) higher capital requirements 
C) hesitation on the part of regulators and legislators 
D) the falling value of S&L assets

Question 5

Liquidity risk may be reduced by which of the following?

Accepted Answer

A) the purchase of fed funds, repurchase agreements, and Eurodollars 
B) the purchase of currency swaps 
C) the purchase of interest rate swaps 
D) All of the above are correct. 
A) the purchase of fed funds, repurchase agreements, and Eurodollars 
B) the purchase of currency swaps 
C) the purchase of interest rate swaps 
D) All of the above are correct.

Question 6

A financial crisis

Accepted Answer

A) may cause a downturn in the economy. 
B) may be caused by a downturn in the economy. 
C) generally results in the default of many financial and nonfinancial firms. 
D) All of the above are correct. 
A) may cause a downturn in the economy. 
B) may be caused by a downturn in the economy. 
C) generally results in the default of many financial and nonfinancial firms. 
D) All of the above are correct.

Question 7

A hedge spending unit is a spending unit

Accepted Answer

A) where the anticipated revenues significantly exceed the anticipated payment obligations. 
B) is one in which the funds coming in may potentially fall short of the payment outflows if there is an increase in interest rates. 
C) must continuously increase its outstanding debt to meet its current obligations or payments. 
D) None of the above is correct. 
A) where the anticipated revenues significantly exceed the anticipated payment obligations. 
B) is one in which the funds coming in may potentially fall short of the payment outflows if there is an increase in interest rates. 
C) must continuously increase its outstanding debt to meet its current obligations or payments. 
D) None of the above is correct.

Question 8

When interest rates rise, the value of long-term fixed-rate mortgages

Accepted Answer

A) remains the same. 
B) rises. 
C) falls. 
D) rises at diminishing rates. 
A) remains the same. 
B) rises. 
C) falls. 
D) rises at diminishing rates.

Question 9

An Alt-A mortgage is

Accepted Answer

A) a mortgage to some one with bad credit. 
B) is the top 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. 
B) is the top 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.

Question 10

__________________ is the degree to which a spending unit relies on borrowed funds.

Accepted Answer

A) The debt-to-income ratio 
B) The debt deflation ratio 
C) Leveraging 
D) The moral hazard. 
A) The debt-to-income ratio 
B) The debt deflation ratio 
C) Leveraging 
D) The moral hazard.

Question 11

Exchange rate risk can be hedged

Accepted Answer

A) with futures and options. 
B) by purchasing funds in the repurchase agreement, fed funds, or Eurodollar markets. 
C) by using adjustable rate loans. 
D) by diversifying portfolios. 
A) with futures and options. 
B) by purchasing funds in the repurchase agreement, fed funds, or Eurodollar markets. 
C) by using adjustable rate loans. 
D) by diversifying portfolios.

Question 12

Which of the following is false?

Accepted Answer

A) FIs use diversification and expert credit analysis to manage credit risk. 
B) FIs use adjustable rate loans, forwards, futures, options, swaps, and securitizations to manage interest rate risk. 
C) Liquidity risk is managed by the ability to borrow funds. 
D) Exchange rate risk is managed by the ability to borrow funds at a fixed exchange rate. 
A) FIs use diversification and expert credit analysis to manage credit risk. 
B) FIs use adjustable rate loans, forwards, futures, options, swaps, and securitizations to manage interest rate risk. 
C) Liquidity risk is managed by the ability to borrow funds. 
D) Exchange rate risk is managed by the ability to borrow funds at a fixed exchange rate.

Question 13

A critical upset in a financial market characterized by sharp declines in asset prices and the default of many financial and nonfinancial firms is called a

Accepted Answer

A) panic. 
B) bank run. 
C) debt deflation. 
D) financial crisis. 
A) panic. 
B) bank run. 
C) debt deflation. 
D) financial crisis.

Question 14

Which of the following refers to the risk most associated with a shortage of cash?

Accepted Answer

A) interest rate risk 
B) liquidity risk 
C) exchange rate risk 
D) credit risk 
A) interest rate risk 
B) liquidity risk 
C) exchange rate risk 
D) credit risk

Question 15

The financial instability hypothesis attempts to explain

Accepted Answer

A) The long-term decline of the U.S. economy that became apparent in the 1990s. 
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 not to experience long term boom-crisis cycles. 
D) All of the above are correct. 
A) The long-term decline of the U.S. economy that became apparent in the 1990s. 
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 not to experience long term boom-crisis cycles. 
D) All of the above are correct.

Question 16

A speculative spending unit is a spending unit

Accepted Answer

A) where the anticipated revenues significantly exceed the anticipated payment obligations. 
B) is one in which the funds coming in may potentially fall short of the payment outflows if there is an increase in interest rates. 
C) must continuously increase its outstanding debt to meet its current obligations or payments. 
D) None of the above is correct. 
A) where the anticipated revenues significantly exceed the anticipated payment obligations. 
B) is one in which the funds coming in may potentially fall short of the payment outflows if there is an increase in interest rates. 
C) must continuously increase its outstanding debt to meet its current obligations or payments. 
D) None of the above is correct.

Question 17

A critical upset in financial markets characterized by sharp declines in asset prices and the default of many financial and nonfinancial firms is known as which of the following?

Accepted Answer

A) a moral hazard problem 
B) a financial crisis 
C) an off-balance-sheet upset 
D) a bank run 
A) a moral hazard problem 
B) a financial crisis 
C) an off-balance-sheet upset 
D) a bank run

Question 18

Which of the following is false?

Accepted Answer

A) According to Minsky, in an extended recovery, the seeds of an eventual downturn are planted. 
B) A long term cycle of boom and bust is an inherent part of a capitalist economy. 
C) As spending units move from hedge to speculative to Ponzi units, their debt-income ratios rise. 
D) Minsky's financial instability hypothesis attempts to explain the short-term year to year gyrations in the economy. 
A) According to Minsky, in an extended recovery, the seeds of an eventual downturn are planted. 
B) A long term cycle of boom and bust is an inherent part of a capitalist economy. 
C) As spending units move from hedge to speculative to Ponzi units, their debt-income ratios rise. 
D) Minsky's financial instability hypothesis attempts to explain the short-term year to year gyrations in the economy.

Question 19

Which of the following are used to minimize both exchange rate and interest rate risks?

Accepted Answer

A) futures and options 
B) adjustable rate loans 
C) expert credit analysis 
D) nondeposit liabilities 
A) futures and options 
B) adjustable rate loans 
C) expert credit analysis 
D) nondeposit liabilities

Question 20

Which of the following is false?

Accepted Answer

A) Moral hazard refers to the reduction in market discipline that comes with the presence of a safety net to prevent losses. The presence of deposit insurance or the belief that regulators will take mitigating actions in the event of a financial crisis creates moral hazard. 
B) Banks and other intermediaries are given an incentive to invest in riskier loans and investments because of deposit insurance. 
C) Mega mergers in the financial services industry may lead to a moral hazard problem in the future if market participants believe that the resulting firms would be bailed out if they ran into serious problems. 
D) The moral hazard problem also exists in international financial markets if participants believe that no one would bail out a country in crisis, thus reducing losses from what they otherwise would be. 
A) Moral hazard refers to the reduction in market discipline that comes with the presence of a safety net to prevent losses. The presence of deposit insurance or the belief that regulators will take mitigating actions in the event of a financial crisis creates moral hazard. 
B) Banks and other intermediaries are given an incentive to invest in riskier loans and investments because of deposit insurance. 
C) Mega mergers in the financial services industry may lead to a moral hazard problem in the future if market participants believe that the resulting firms would be bailed out if they ran into serious problems. 
D) The moral hazard problem also exists in international financial markets if participants believe that no one would bail out a country in crisis, thus reducing losses from what they otherwise would be.

Exam 11: Financial Instability and Strains on the Financial System

Disintermediation occurred in the S&L industry

Which of the following terms best describes the U.S. Savings and Loan industry during the 1980s?

According to the financial instability hypothesis, when government intervenes to break a downturn

Which of the following did not contribute to the 1980s Savings and Loan crisis?

Liquidity risk may be reduced by which of the following?

A financial crisis

A hedge spending unit is a spending unit

When interest rates rise, the value of long-term fixed-rate mortgages

An Alt-A mortgage is

__________________ is the degree to which a spending unit relies on borrowed funds.

Exchange rate risk can be hedged

Which of the following is false?

A critical upset in a financial market characterized by sharp declines in asset prices and the default of many financial and nonfinancial firms is called a

Which of the following refers to the risk most associated with a shortage of cash?

The financial instability hypothesis attempts to explain

A speculative spending unit is a spending unit

A critical upset in financial markets characterized by sharp declines in asset prices and the default of many financial and nonfinancial firms is known as which of the following?

Which of the following is false?

Which of the following are used to minimize both exchange rate and interest rate risks?

Which of the following is false?

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

Filters