Exam 20: The Financial System: Opportunities and Dangers

The resolution authority over shadow banks given to the FDIC as part of the Dodd-Frank Act, gives the FDIC authority to:

The benefit of stricter capital requirements for shadow banks is _____, while the cost is _____.

In each case identify whether the situation is a case of adverse selection or moral hazard. Explain. a. Jasper knows, but the car rental company does not know when he is trying to rent a car during a blizzard in Wisconsin, that Jasper grew up in a tropical climate and has no idea how to drive in cold weather and snowy conditions. b. Joan has received a loan from the bank to finance the purchase of more inventory for her quilt shop, but she intends to use the money (without telling the bank) to take a safari in Africa. c. Some companies sell annuities, which are policies that make periodic payments as long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity issuers do not know, that people in Jane's family routinely live to age 100 .

What were the mistakes of the following parties which finally led to the recession of 2008-2009? a. Homebuyers b. Government policymakers c. Investment banks.

Governments can reduce the problem of adverse selection by:

The Grameen Bank makes loans primarily to:

Conventional monetary and fiscal policies during a financial crisis are aimed at _____, while acting as a lender of last resort or injecting government funds into the financial system during a financial crisis is aimed at _____.

Stocks are:

What was the effect of the recession of 2008-2009 on output and prices? Give one example of conventional monetary policies and fiscal policies used by the government to fix the problem.

Why was the recession of 2008-2009 sometimes also referred as the subprime crisis?

One advantage of CoCo bonds (contingent convertible debt), over alternative methods for recapitalizing banks, is that:

The Grameen Bank is:

When the phrase _____ was coined, it referred to _____.

The asset price that experienced a boom prior to the 2008-2009 recession was the price of:

Obtaining funds for a business by borrowing, such as through the bond market, is called _____ finance.

A situation in which a solvent bank does not have sufficient cash on hand to satisfy the withdrawal demands of depositors is called a(n) _____ crisis.

A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called:

A rise in the price of an asset above its fundamental value is called a(n):

Diversification allows savers to largely eliminate:

Provide one argument in favor of and one argument against each of the following proposals to prevent future financial crises. a. require shadow banks to hold more capital, b. give the FDIC resolution authority over shadow banks, c. impose higher capital requirements on larger banks, d. prohibit banks from making speculative investments.