Question 1

Monetary policy is often ineffective in a banking crisis because businesses and consumers:

Accepted Answer

A)  respond to low interest rates by borrowing and spending so much that inflation results. 
B)  borrow large amounts because interest rates are so low, but they are unwilling to spend the money that they have borrowed. 
C)  aren't willing to borrow and spend even though interest rates are very low. 
D)  aren't willing to borrow and spend because interest rates are so high. 
A)  respond to low interest rates by borrowing and spending so much that inflation results. 
B)  borrow large amounts because interest rates are so low, but they are unwilling to spend the money that they have borrowed. 
C)  aren't willing to borrow and spend even though interest rates are very low. 
D)  aren't willing to borrow and spend because interest rates are so high.

Question 2

The asset bubble in commercial real estate that caused the savings and loan crisis in the 1980s burst because:

Accepted Answer

A)  real estate developers built too much office space. 
B)  construction costs were too high. 
C)  the interest rates on construction loans were unprofitably low for banks. 
D)  the government established rent controls on newly constructed office buildings. 
A)  real estate developers built too much office space. 
B)  construction costs were too high. 
C)  the interest rates on construction loans were unprofitably low for banks. 
D)  the government established rent controls on newly constructed office buildings.

Question 3

The panic of 1873 began when:

Accepted Answer

A)  the Federal Reserve began to require banks to hold reserves and meet capital requirements. 
B)  the Civil War started. 
C)  Jay Cooke and Co., a financial firm that was heavily invested in the railroad industry, failed. 
D)  Franklin Delano Roosevelt declared a bank holiday. 
A)  the Federal Reserve began to require banks to hold reserves and meet capital requirements. 
B)  the Civil War started. 
C)  Jay Cooke and Co., a financial firm that was heavily invested in the railroad industry, failed. 
D)  Franklin Delano Roosevelt declared a bank holiday.

Question 4

The Wall Street Reform and Consumer Protection Act of 2010 addressed all of the following EXCEPT:

Accepted Answer

A)  consumer protection. 
B)  derivatives regulation. 
C)  regulation of shadow banks. 
D)  interest rate ceilings on checkable deposits. 
A)  consumer protection. 
B)  derivatives regulation. 
C)  regulation of shadow banks. 
D)  interest rate ceilings on checkable deposits.

Question 5

Why are banking-crisis recessions so bad?

Accepted Answer

Banking crises usually lead to recession

Question 6

What caused the banking crises in the 1990s in Finland, Sweden, and Japan?

Accepted Answer

Banks in all three countries lent heavil

Question 7

Which of the following is an example of maturity transformation?

Accepted Answer

A)  Anne sells her house for $200,000 and uses the money to open a bakery. 
B)  Matthew sells his car and uses the money to pay college tuition. 
C)  Justin takes $10,000 from his savings account and uses it to buy some Apple stock. 
D)  Michael closes his checking account at Bank of America and opens a checking account at a local credit union. 
A)  Anne sells her house for $200,000 and uses the money to open a bakery. 
B)  Matthew sells his car and uses the money to pay college tuition. 
C)  Justin takes $10,000 from his savings account and uses it to buy some Apple stock. 
D)  Michael closes his checking account at Bank of America and opens a checking account at a local credit union.

Question 8

The repo market:

Accepted Answer

A)  is where the Federal Reserve makes loans to banks. 
B)  refers to transactions between lenders and borrowers with bad credit. 
C)  is the market for houses in foreclosure. 
D)  is the overnight credit market. 
A)  is where the Federal Reserve makes loans to banks. 
B)  refers to transactions between lenders and borrowers with bad credit. 
C)  is the market for houses in foreclosure. 
D)  is the overnight credit market.

Question 9

During most of the 1990s and 2000s, Ireland was called:

Accepted Answer

A)  the Celtic Tiger. 
B)  a tax haven for wealthy people who were avoiding the U.S. income tax. 
C)  the Sapphire Isle. 
D)  the Axis of Evil. 
A)  the Celtic Tiger. 
B)  a tax haven for wealthy people who were avoiding the U.S. income tax. 
C)  the Sapphire Isle. 
D)  the Axis of Evil.

Question 10

Maturity transformation is converting _____ liabilities into _____ assets.

Accepted Answer

A)  short-term; long-term 
B)  short-term; short-term 
C)  long-term; long-term 
D)  long-term; short-term 
A)  short-term; long-term 
B)  short-term; short-term 
C)  long-term; long-term 
D)  long-term; short-term

Question 11

Even if a bank is in excellent financial condition, a bank run can still drive it to failure.

Accepted Answer

A) True 
 B)False

Question 12

Shadow banks differ from commercial banks because shadow banks:

Accepted Answer

A)  accept deposits only from businesses and state and local governments, not from individuals. 
B)  are not subject to as many regulations as commercial banks. 
C)  are not allowed to pay interest on deposits. 
D)  can operate branches in more than one state. 
A)  accept deposits only from businesses and state and local governments, not from individuals. 
B)  are not subject to as many regulations as commercial banks. 
C)  are not allowed to pay interest on deposits. 
D)  can operate branches in more than one state.

Question 13

One problem with holding money as an asset is that it doesn't earn any income.

Accepted Answer

A) True 
 B)False

Question 14

Assets that offer a _____ rate of return also offer _____ liquidity.

Accepted Answer

A)  higher; higher 
B)  lower; lower 
C)  higher; lower 
D)  There is no trade-off between rate of return and liquidity. 
A)  higher; higher 
B)  lower; lower 
C)  higher; lower 
D)  There is no trade-off between rate of return and liquidity.

Question 15

When the economy is in a liquidity trap, consumers and businesses aren't willing to borrow and spend even though interest rates may be zero.

Accepted Answer

A) True 
 B)False

Question 16

Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because most major economies had _____ unemployment and _____ inflation.

Accepted Answer

A)  low; low 
B)  low; high 
C)  high; low 
D)  high; high 
A)  low; low 
B)  low; high 
C)  high; low 
D)  high; high

Question 17

Following the financial crisis of 2008, commercial banks relied heavily on the Fed as a lender of last resort, borrowing approximately $700 billion.

Accepted Answer

A) True 
 B)False

Question 18

When troubled financial institutions are forced to sell assets quickly at a deep discount, this is a(n):

Accepted Answer

A)  debt overhang. 
B)  vicious cycle of deleveraging. 
C)  maturity transformation. 
D)  asset bubble. 
A)  debt overhang. 
B)  vicious cycle of deleveraging. 
C)  maturity transformation. 
D)  asset bubble.

Question 19

After the 2008 financial crisis, policy makers realized that the scope of banking regulation was:

Accepted Answer

A)  too narrow, because the Federal Reserve was the only agency with any power to regulate banks. 
B)  too broad, because both depository and shadow banks were overregulated. 
C)  too broad, because market forces, not government regulation, should be allowed to determine the outcome of a financial crisis. 
D)  too narrow, because shadow banks were not subject to much regulation. 
A)  too narrow, because the Federal Reserve was the only agency with any power to regulate banks. 
B)  too broad, because both depository and shadow banks were overregulated. 
C)  too broad, because market forces, not government regulation, should be allowed to determine the outcome of a financial crisis. 
D)  too narrow, because shadow banks were not subject to much regulation.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 29: Crises and Consequences

Monetary policy is often ineffective in a banking crisis because businesses and consumers:

The asset bubble in commercial real estate that caused the savings and loan crisis in the 1980s burst because:

The panic of 1873 began when:

The Wall Street Reform and Consumer Protection Act of 2010 addressed all of the following EXCEPT:

Why are banking-crisis recessions so bad?

What caused the banking crises in the 1990s in Finland, Sweden, and Japan?

Which of the following is an example of maturity transformation?

The repo market:

During most of the 1990s and 2000s, Ireland was called:

Maturity transformation is converting _____ liabilities into _____ assets.

Even if a bank is in excellent financial condition, a bank run can still drive it to failure.

Shadow banks differ from commercial banks because shadow banks:

One problem with holding money as an asset is that it doesn't earn any income.

Assets that offer a _____ rate of return also offer _____ liquidity.

When the economy is in a liquidity trap, consumers and businesses aren't willing to borrow and spend even though interest rates may be zero.

Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because most major economies had _____ unemployment and _____ inflation.

Following the financial crisis of 2008, commercial banks relied heavily on the Fed as a lender of last resort, borrowing approximately $700 billion.

When troubled financial institutions are forced to sell assets quickly at a deep discount, this is a(n):

After the 2008 financial crisis, policy makers realized that the scope of banking regulation was:

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

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

Maturity transformation is converting _ liabilities into _ assets.

Assets that offer a _ rate of return also offer _ liquidity.

Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because most major economies had _ unemployment and _ inflation.