Question 1

Banks help mitigate the problem of adverse selection in lending by:

Accepted Answer

A)  developing expertise in evaluating the business prospects of loan applicants. 
B)  making loans to many different types of borrowers. 
C)  adjusting the amount of the loan to fit the requirements of the borrower. 
D)  monitoring the business after a loan is made to the business. 
A)  developing expertise in evaluating the business prospects of loan applicants. 
B)  making loans to many different types of borrowers. 
C)  adjusting the amount of the loan to fit the requirements of the borrower. 
D)  monitoring the business after a loan is made to the business.

Question 2

The principal purpose of a central bank acting as a lender of last resort is to:

Accepted Answer

A)  prevent the failure of insolvent financial institutions. 
B)  maintain the liquidity of the financial system. 
C)  provide adequate funds to finance the government's spending. 
D)  keep interest rates as low as possible. 
A)  prevent the failure of insolvent financial institutions. 
B)  maintain the liquidity of the financial system. 
C)  provide adequate funds to finance the government's spending. 
D)  keep interest rates as low as possible.

Question 3

The potential problem faced by the rest of Europe in the event of a Greek debt default is:

Accepted Answer

A)  the inability of the European Central Bank to conduct open market operations. 
B)  the risk of banks holding Greek debt becoming insolvent. 
C)  an increase in the number of U.S. dollars traded per euro in the foreign exchange market. 
D)  the strain on the European banking system, while banks in the rest of the world would be unaffected. 
A)  the inability of the European Central Bank to conduct open market operations. 
B)  the risk of banks holding Greek debt becoming insolvent. 
C)  an increase in the number of U.S. dollars traded per euro in the foreign exchange market. 
D)  the strain on the European banking system, while banks in the rest of the world would be unaffected.

Question 4

An asset-price bubble bursts if there is:

Accepted Answer

A)  a panic cycle of asset sales and falling asset prices. 
B)  a statement from the central bank stating that the bubble is over. 
C)  an excess demand for an asset that raises asset prices. 
D)  a sharp decrease in interest rates that pricks the asset-price bubble. 
A)  a panic cycle of asset sales and falling asset prices. 
B)  a statement from the central bank stating that the bubble is over. 
C)  an excess demand for an asset that raises asset prices. 
D)  a sharp decrease in interest rates that pricks the asset-price bubble.

Question 5

The government making loans that are secured by collateral of dubious value to prop up the financial system is an example of:

Accepted Answer

A)  a giveaway of public funds. 
B)  risky lending. 
C)  a capital injection. 
D)  conventional monetary policy. 
A)  a giveaway of public funds. 
B)  risky lending. 
C)  a capital injection. 
D)  conventional monetary policy.

Question 6

Two types of problems that arise due to asymmetric information are:

Accepted Answer

A)  systematic and idiosyncratic risk. 
B)  risk aversion and diversification 
C)  illiquidity and insolvency. 
D)  moral hazard and adverse selection. 
A)  systematic and idiosyncratic risk. 
B)  risk aversion and diversification 
C)  illiquidity and insolvency. 
D)  moral hazard and adverse selection.

Question 7

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

Accepted Answer

A)  a steep decline in asset prices driven by fire sales to restore liquidity. 
B)  a sharp decline in interest rates to compensate for added risk. 
C)  an increase in government deposit-insurance coverage. 
D)  a rapid slowdown in the withdrawal of deposits. 
A)  a steep decline in asset prices driven by fire sales to restore liquidity. 
B)  a sharp decline in interest rates to compensate for added risk. 
C)  an increase in government deposit-insurance coverage. 
D)  a rapid slowdown in the withdrawal of deposits.

Question 8

If banks fear failure and become more conservative in making loans, then the sharp decline in bank lending is called a credit:

Accepted Answer

A)  crunch. 
B)  hazard. 
C)  bubble. 
D)  swap. 
A)  crunch. 
B)  hazard. 
C)  bubble. 
D)  swap.

Question 9

The set of institutions in the economy that facilitates the flow of funds between savers and investors is called the:

Accepted Answer

A)  financial system. 
B)  Federal Reserve system. 
C)  World Bank. 
D)  fiscal system. 
A)  financial system. 
B)  Federal Reserve system. 
C)  World Bank. 
D)  fiscal system.

Question 10

What is the difference between systematic and idiosyncratic risk? Which type of risk can be almost eliminated through diversification?

Accepted Answer

Risk that affects all businesses at the

Question 11

Governments can reduce the problem of moral hazard by:

Accepted Answer

A)  requiring licenses be obtained before starting a business. 
B)  prosecuting fraud and malfeasance. 
C)  keeping interest rates low. 
D)  reducing corporate income tax rates. 
A)  requiring licenses be obtained before starting a business. 
B)  prosecuting fraud and malfeasance. 
C)  keeping interest rates low. 
D)  reducing corporate income tax rates.

Question 12

Financial intermediaries that sell shares to savers and use their funds to buy diversified pools of assets are called:

Accepted Answer

A)  pension funds. 
B)  insurance companies. 
C)  mutual funds. 
D)  commercial banks. 
A)  pension funds. 
B)  insurance companies. 
C)  mutual funds. 
D)  commercial banks.

Question 13

The financial system refers to the:

Accepted Answer

A)  mechanism that transfers wealth from consumers to corporations. 
B)  institutions that facilitate the flow of funds between savers and investors. 
C)  arrangements that allow money to circulate in the economy. 
D)  government regulations that govern the terms of borrowing and lending. 
A)  mechanism that transfers wealth from consumers to corporations. 
B)  institutions that facilitate the flow of funds between savers and investors. 
C)  arrangements that allow money to circulate in the economy. 
D)  government regulations that govern the terms of borrowing and lending.

Question 14

To the extent that risky mortgage-backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with:

Accepted Answer

A)  homebuyers. 
B)  mortgage brokers. 
C)  investment banks. 
D)  the Federal Reserve 
A)  homebuyers. 
B)  mortgage brokers. 
C)  investment banks. 
D)  the Federal Reserve

Question 15

The recession produced by a financial crisis:

Accepted Answer

A)  mitigates the effects of the financial crisis. 
B)  puts an end to the financial crisis. 
C)  puts further pressure on asset prices and financial institutions. 
D)  re-inflates the asset-price bubble. 
A)  mitigates the effects of the financial crisis. 
B)  puts an end to the financial crisis. 
C)  puts further pressure on asset prices and financial institutions. 
D)  re-inflates the asset-price bubble.

Question 16

Equity financing is obtaining funds for a business by:

Accepted Answer

A)  borrowing. 
B)  issuing ownership shares. 
C)  seigniorage. 
D)  government subsidy 
A)  borrowing. 
B)  issuing ownership shares. 
C)  seigniorage. 
D)  government subsidy

Question 17

Reducing risk by holding many imperfectly correlated assets is called:

Accepted Answer

A)  diversification. 
B)  moral hazard. 
C)  risk aversion. 
D)  leveraging. 
A)  diversification. 
B)  moral hazard. 
C)  risk aversion. 
D)  leveraging.

Question 18

The Volcker rule restricts excessive risk taking by commercial banks by:

Accepted Answer

A)  prohibiting banks from making certain kinds of speculative investments. 
B)  increasing the amount of capital banks must hold. 
C)  decreasing the deposit insurance coverage of depositors in commercial banks. 
D)  limiting the compensation that bank executives can be paid. 
A)  prohibiting banks from making certain kinds of speculative investments. 
B)  increasing the amount of capital banks must hold. 
C)  decreasing the deposit insurance coverage of depositors in commercial banks. 
D)  limiting the compensation that bank executives can be paid.

Question 19

Which of the following policies are intended to reduce the likelihood of future financial crises?

Accepted Answer

A)  restricting the size of financial firms 
B)  limiting excessive risk taking 
C)  reforming regulatory agencies 
D)  all of the above 
A)  restricting the size of financial firms 
B)  limiting excessive risk taking 
C)  reforming regulatory agencies 
D)  all of the above

Question 20

To the extent that low interest rates contributed to the financial crisis of 2008-2009, the blame for this policy lies with:

Accepted Answer

A)  the Federal Reserve. 
B)  investment banks. 
C)  rating agencies. 
D)  mortgage brokers. 
A)  the Federal Reserve. 
B)  investment banks. 
C)  rating agencies. 
D)  mortgage brokers.

Banks help mitigate the problem of adverse selection in lending by:

The principal purpose of a central bank acting as a lender of last resort is to:

The potential problem faced by the rest of Europe in the event of a Greek debt default is:

An asset-price bubble bursts if there is:

The government making loans that are secured by collateral of dubious value to prop up the financial system is an example of:

Two types of problems that arise due to asymmetric information are:

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

If banks fear failure and become more conservative in making loans, then the sharp decline in bank lending is called a credit:

The set of institutions in the economy that facilitates the flow of funds between savers and investors is called the:

What is the difference between systematic and idiosyncratic risk? Which type of risk can be almost eliminated through diversification?

Governments can reduce the problem of moral hazard by:

Financial intermediaries that sell shares to savers and use their funds to buy diversified pools of assets are called:

The financial system refers to the:

To the extent that risky mortgage-backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with:

The recession produced by a financial crisis:

Equity financing is obtaining funds for a business by:

Reducing risk by holding many imperfectly correlated assets is called:

The Volcker rule restricts excessive risk taking by commercial banks by:

Which of the following policies are intended to reduce the likelihood of future financial crises?

To the extent that low interest rates contributed to the financial crisis of 2008-2009, the blame for this policy lies with:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

Filters

Exam 20: The Financial System: Opportunities and Dangers

Banks help mitigate the problem of adverse selection in lending by:

The principal purpose of a central bank acting as a lender of last resort is to:

The potential problem faced by the rest of Europe in the event of a Greek debt default is:

An asset-price bubble bursts if there is:

The government making loans that are secured by collateral of dubious value to prop up the financial system is an example of:

Two types of problems that arise due to asymmetric information are:

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

If banks fear failure and become more conservative in making loans, then the sharp decline in bank lending is called a credit:

The set of institutions in the economy that facilitates the flow of funds between savers and investors is called the:

What is the difference between systematic and idiosyncratic risk? Which type of risk can be almost eliminated through diversification?

Governments can reduce the problem of moral hazard by:

Financial intermediaries that sell shares to savers and use their funds to buy diversified pools of assets are called:

The financial system refers to the:

To the extent that risky mortgage-backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with:

The recession produced by a financial crisis:

Equity financing is obtaining funds for a business by:

Reducing risk by holding many imperfectly correlated assets is called:

The Volcker rule restricts excessive risk taking by commercial banks by:

Which of the following policies are intended to reduce the likelihood of future financial crises?

To the extent that low interest rates contributed to the financial crisis of 2008-2009, the blame for this policy lies with:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand Ii: Applying the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

Filters