Question 1

What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common?

Accepted Answer

A)  Each was followed by a period of record high growth rates of real GDP. 
B)  Both were ended by aggressive monetary policies of the central bank. 
C)  Each was followed by a deep recession and slow recovery. 
D)  Both were caused by a real estate bubble. 
A)  Each was followed by a period of record high growth rates of real GDP. 
B)  Both were ended by aggressive monetary policies of the central bank. 
C)  Each was followed by a deep recession and slow recovery. 
D)  Both were caused by a real estate bubble.

Question 2

In a banking crisis, banks usually:

Accepted Answer

A)  see an increase in the value of their assets. 
B)  lend out all of their excess reserves. 
C)  hold more excess reserves than usual. 
D)  offer discounts to customers to give them the incentive to borrow money. 
A)  see an increase in the value of their assets. 
B)  lend out all of their excess reserves. 
C)  hold more excess reserves than usual. 
D)  offer discounts to customers to give them the incentive to borrow money.

Question 3

Briefly explain the four main elements of the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

Accepted Answer

(1) The Dodd-Frank Act established a new

Question 4

Following the banking crisis that began in 2007, the unemployment rate in Ireland, which had been less than 5%, increased above 10%.

Accepted Answer

A) True 
 B)False

Question 5

A sudden and widespread disruption of financial institutions and markets is known as:

Accepted Answer

A)  a liquidity trap. 
B)  the fallacy of composition. 
C)  a financial panic. 
D)  stagflation. 
A)  a liquidity trap. 
B)  the fallacy of composition. 
C)  a financial panic. 
D)  stagflation.

Question 6

A financial intermediary that provides liquid assets in the form of deposits to savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n):

Accepted Answer

A)  insurance company. 
B)  bank. 
C)  pension fund. 
D)  hedge fund. 
A)  insurance company. 
B)  bank. 
C)  pension fund. 
D)  hedge fund.

Question 7

Spain's financial difficulties following the crisis of 2008 were due primarily to a housing bubble.

Accepted Answer

A) True 
 B)False

Question 8

A shadow bank is a:

Accepted Answer

A)  branch of the main office of a bank. 
B)  bank that is operated by a shadow government. 
C)  financial firm that is not closely watched or effectively regulated. 
D)  a credit union or a savings and loan institution. 
A)  branch of the main office of a bank. 
B)  bank that is operated by a shadow government. 
C)  financial firm that is not closely watched or effectively regulated. 
D)  a credit union or a savings and loan institution.

Question 9

During the credit crunch in the Great Depression, the spread-the interest rate on Baa corporate bonds minus the interest rate for government borrowing:

Accepted Answer

A)  became negative. 
B)  was equal to zero. 
C)  grew to more than 7%. 
D)  fluctuated randomly. 
A)  became negative. 
B)  was equal to zero. 
C)  grew to more than 7%. 
D)  fluctuated randomly.

Question 10

Maturity transformation is conversion of long-term liabilities to short-term assets.

Accepted Answer

A) True 
 B)False

Question 11

Medieval goldsmiths were strongly opposed to lending out their customers' gold and silver.

Accepted Answer

A) True 
 B)False

Question 12

After the 2008 financial crisis, proponents of austerity argued that fiscal stimulus was inappropriate because:

Accepted Answer

A)  cuts in government spending had increased interest rates. 
B)  the increase in government spending had raised interest rates. 
C)  unemployment remained high after the stimulus was implemented in 2009. 
D)  monetary policy is more effective when the economy is close to the zero bound on interest rates. 
A)  cuts in government spending had increased interest rates. 
B)  the increase in government spending had raised interest rates. 
C)  unemployment remained high after the stimulus was implemented in 2009. 
D)  monetary policy is more effective when the economy is close to the zero bound on interest rates.

Question 13

In general, the higher the rate of return on an asset, the lower its liquidity.

Accepted Answer

A) True 
 B)False

Question 14

Lehman Brothers was forced to declare bankruptcy in September 2008, when:

Accepted Answer

A)  Barack Obama was elected president. 
B)  it purchased Bear Stearns, another investment bank. 
C)  one of its short-term lenders, JPMorgan Chase, demanded $5 billion in cash as collateral for loans it had made to Lehman. 
D)  the European Union abandoned the euro. 
A)  Barack Obama was elected president. 
B)  it purchased Bear Stearns, another investment bank. 
C)  one of its short-term lenders, JPMorgan Chase, demanded $5 billion in cash as collateral for loans it had made to Lehman. 
D)  the European Union abandoned the euro.

Question 15

When the central bank acts as a lender of last resort, it:

Accepted Answer

A)  raises reserve requirements. 
B)  reduces reserve requirements. 
C)  provides a liquidity trap. 
D)  provides funds to financial institutions that cannot borrow from the private credit markets. 
A)  raises reserve requirements. 
B)  reduces reserve requirements. 
C)  provides a liquidity trap. 
D)  provides funds to financial institutions that cannot borrow from the private credit markets.

Question 16

In the United States during the time between the Civil War and the Great Depression:

Accepted Answer

A)  banks were completely unregulated. 
B)  bank runs rarely occurred. 
C)  there was no insurance on bank deposits. 
D)  there were very few national banks. 
A)  banks were completely unregulated. 
B)  bank runs rarely occurred. 
C)  there was no insurance on bank deposits. 
D)  there were very few national banks.

Question 17

One of the lessons learned from the 2008 financial crisis was that:

Accepted Answer

A)  banks had been overregulated. 
B)  the Federal Deposit Insurance Corporation was ineffective. 
C)  banking regulation was too narrow; before the crisis, shadow banks were not subject to the same regulation as depository institutions. 
D)  financial crises are usually very short, and recovery from them is relatively quick and easy. 
A)  banks had been overregulated. 
B)  the Federal Deposit Insurance Corporation was ineffective. 
C)  banking regulation was too narrow; before the crisis, shadow banks were not subject to the same regulation as depository institutions. 
D)  financial crises are usually very short, and recovery from them is relatively quick and easy.

Question 18

During the financial crisis of 2008, the Federal Reserve bought not only Treasury bills but also commercial paper issued by private companies and the debt of Fannie Mae and Freddie Mac.

Accepted Answer

A) True 
 B)False

Question 19

Fiscal austerity is _____ fiscal policy, such as _____ in government spending and tax _____ designed to _____ unemployment and _____.

Accepted Answer

A)  expansionary; increases; cuts; reduce; increase output 
B)  expansionary; increases; cuts; increase; decrease output 
C)  contractionary; decreases; increases; ignore; reduce budget deficits 
D)  contractionary; decreases; increases; ignore; increase budget deficits 
A)  expansionary; increases; cuts; reduce; increase output 
B)  expansionary; increases; cuts; increase; decrease output 
C)  contractionary; decreases; increases; ignore; reduce budget deficits 
D)  contractionary; decreases; increases; ignore; increase budget deficits

Question 20

From the 1930s until the 2008 financial crisis, banking regulation addressed all of the following except:

Accepted Answer

A)  deposit insurance. 
B)  capital requirements. 
C)  reserve requirements. 
D)  shadow banks. 
A)  deposit insurance. 
B)  capital requirements. 
C)  reserve requirements. 
D)  shadow banks.

Exam 29: Crises and Consequences

What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common?

In a banking crisis, banks usually:

Briefly explain the four main elements of the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

Following the banking crisis that began in 2007, the unemployment rate in Ireland, which had been less than 5%, increased above 10%.

A sudden and widespread disruption of financial institutions and markets is known as:

A financial intermediary that provides liquid assets in the form of deposits to savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n):

Spain's financial difficulties following the crisis of 2008 were due primarily to a housing bubble.

A shadow bank is a:

During the credit crunch in the Great Depression, the spread-the interest rate on Baa corporate bonds minus the interest rate for government borrowing:

Maturity transformation is conversion of long-term liabilities to short-term assets.

Medieval goldsmiths were strongly opposed to lending out their customers' gold and silver.

After the 2008 financial crisis, proponents of austerity argued that fiscal stimulus was inappropriate because:

In general, the higher the rate of return on an asset, the lower its liquidity.

Lehman Brothers was forced to declare bankruptcy in September 2008, when:

When the central bank acts as a lender of last resort, it:

In the United States during the time between the Civil War and the Great Depression:

One of the lessons learned from the 2008 financial crisis was that:

During the financial crisis of 2008, the Federal Reserve bought not only Treasury bills but also commercial paper issued by private companies and the debt of Fannie Mae and Freddie Mac.

Fiscal austerity is _____ fiscal policy, such as _____ in government spending and tax _____ designed to _____ unemployment and _____.

From the 1930s until the 2008 financial crisis, banking regulation addressed all of the following except:

First Principles

Economic Models- Trade-Offs and Trade

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas- Meddling With Markets

Elasticity

Taxes

The Rational Consumer

International Trade

Decision Making by Individuals and Firms

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Uncertainty, Risk, and Private Information

Macroeconomics- the Big Picture

Gdp and the Consumer Price Index

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending

Fiscal Policy

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Macroeconomics- Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

Toward a Fuller Understanding

Consumer Preferences and Consumer Choice

Indifference Curve Analysis of Labor Supply

Filters

Fiscal austerity is ___ fiscal policy, such as _ in government spending and tax _ designed to _ unemployment and ___.