Question 1

President Franklin Delano Roosevelt declared a bank holiday, closing all U.S. banks in ________.

Accepted Answer

A)  July 1776. 
B)  October 1929. 
C)  March 1933 
D)  September 2001. 
A)  July 1776. 
B)  October 1929. 
C)  March 1933 
D)  September 2001. C

Question 2

The notion that lenders must select from a pool of bad credit risks, because the most undesirable borrowers are those that most actively seek out a loan is known as the________.

Accepted Answer

A)  moral hazard problem. 
B)  ornamental torsion problem. 
C)  adverse selection problem. 
D)  asymmetric innovation problem. 
A)  moral hazard problem. 
B)  ornamental torsion problem. 
C)  adverse selection problem. 
D)  asymmetric innovation problem. C

Question 3

How is asymmetric information related to asset-price bubbles?

Accepted Answer

If it were possible for saver-lenders to know the true value of financial assets, they would never be tempted to pay more than the asset is truly worth. In reality, though, savers know too little and must make the best of the available information. When the prices of certain assets are rising, savers may interpret this as a signal that the assets' fundamental value is rising. Because savers know that they and other savers don't know for sure whether the fundamental value is rising nor how high the price might go, they may expect to profit from the price increase. Asymmetric information forces lenders to extend credit on the basis of "creditworthiness," rather than unobservable and/or unverifiable aspects of the specific purpose of the loan. An increase in asset prices, regardless the cause, enhances the creditworthiness of holders of such assets. Moreover, the belief -- shared by lender and borrower alike -- that possession of high-value assets reduces the probability of default may inspire the latter to choose risky behaviors and the latter to remain ignorant or complacent. So long as financial markets reward holders of rising-price assets, the price will continue to rise.

Question 4

Why is responding to a financial crisis by bailing out financial institutions more effective than direct support of nonfinancial businesses?

Accepted Answer

In the wake of a financial crisis, many

Question 5

The main reason that many businesses fail when the price level is falling is that ________.

Accepted Answer

A)  deflation causes a decline in short-run aggregate supply 
B)  as prices fall, businesses are unable to predict the quantity of output they will be able to sell 
C)  the real value of the firms assets declines in proportion to the decrease in the price level 
D)  falling prices mean that regular loan payments become increasingly difficult 
A)  deflation causes a decline in short-run aggregate supply 
B)  as prices fall, businesses are unable to predict the quantity of output they will be able to sell 
C)  the real value of the firms assets declines in proportion to the decrease in the price level 
D)  falling prices mean that regular loan payments become increasingly difficult

Question 6

The analysis of asymmetric information problems is called ________.

Accepted Answer

A)  adverse selection 
B)  microeconomics 
C)  cybernetics 
D)  agency theory 
A)  adverse selection 
B)  microeconomics 
C)  cybernetics 
D)  agency theory

Question 7

Which of the following statements is correct?

Accepted Answer

A)  assets plus liabilities equal net worth. 
B)  liabilities plus net worth equal assets. 
C)  assets plus net worth equal liabilities. 
D)  liabilities minus net worth equal assets. 
A)  assets plus liabilities equal net worth. 
B)  liabilities plus net worth equal assets. 
C)  assets plus net worth equal liabilities. 
D)  liabilities minus net worth equal assets.

Question 8

What is meant by the expectations channel of monetary transmission? How does it relate to the credit channel?

Accepted Answer

When households and businesses expect in

Question 9

Assume that a firm has $100 million in real assets and $90 in real liabilities. If the price level falls by ten percent, the real value of liabilities would ________.

Accepted Answer

A)  fall to $81 million. 
B)  change, but more information must be provided to determine the exact movement. 
C)  remain unchanged. 
D)  rise to $99 million. 
A)  fall to $81 million. 
B)  change, but more information must be provided to determine the exact movement. 
C)  remain unchanged. 
D)  rise to $99 million.

Question 10

The key objective of purchases by the Federal Reserve of over $1 trillion worth of debt issued by private firms was ________.

Accepted Answer

A)  to avoid the bankruptcy of the issuing firms 
B)  to manage expectations 
C)  to prevent such firms from being acquired by foreign companies 
D)  to stimulate spending by firms and households 
A)  to avoid the bankruptcy of the issuing firms 
B)  to manage expectations 
C)  to prevent such firms from being acquired by foreign companies 
D)  to stimulate spending by firms and households

Question 11

An early sign that financial innovation might be leading toward a financial crisis is ________.

Accepted Answer

A)  deleveraging 
B)  a bank panic 
C)  a credit boom 
D)  debt deflation 
A)  deleveraging 
B)  a bank panic 
C)  a credit boom 
D)  debt deflation

Question 12

Attempts by a central bank to increase bank deposits without a decrease in nominal interest rates are referred to as ________.

Accepted Answer

A)  quantitative easing 
B)  credit channeling 
C)  open market operations 
D)  liquidity provision 
A)  quantitative easing 
B)  credit channeling 
C)  open market operations 
D)  liquidity provision

Question 13

A prominent aspect of the Great Depression of the 1930s, but not of the recent Great Recession, is ________.

Accepted Answer

A)  bank panics 
B)  mortgage defaults 
C)  an increase in the credit spread 
D)  nonconventional monetary policy 
A)  bank panics 
B)  mortgage defaults 
C)  an increase in the credit spread 
D)  nonconventional monetary policy

Question 14

The financial innovation of numerical credit scoring contributed to the ________.

Accepted Answer

A)  "democratization of credit" 
B)  reduction of loan-to-value ratios 
C)  "depersonalization of credit" 
D)  reduction of information asymmetries 
A)  "democratization of credit" 
B)  reduction of loan-to-value ratios 
C)  "depersonalization of credit" 
D)  reduction of information asymmetries

Question 15

A $100 million loan with a haircut of four percent requires collateral valued at ________.

Accepted Answer

A)  $104 million 
B)  $96 million 
C)  $4 million 
D)  $400,000 
A)  $104 million 
B)  $96 million 
C)  $4 million 
D)  $400,000

Question 16

How can improvements in statistical analysis of financial data cause the amount of information in financial markets to decline?

Accepted Answer

Statistical analysis is a process of dra

Question 17

The risk that a borrower has a greater understanding about their potential future behavior that a potential lender is known as ________.

Accepted Answer

A)  the problem of adverse selection. 
B)  the problem of moral hazard. 
C)  ornamental torsion. 
D)  the asymmetric innovation problem. 
A)  the problem of adverse selection. 
B)  the problem of moral hazard. 
C)  ornamental torsion. 
D)  the asymmetric innovation problem.

Question 18

The difference between the interest rate on loans to households and firms and the rate on completely safe assets is known as ________.

Accepted Answer

A)  the discount rate. 
B)  the FICO score 
C)  the credit spread. 
D)  the prime rate. 
A)  the discount rate. 
B)  the FICO score 
C)  the credit spread. 
D)  the prime rate.

Question 19

In the event that nominal interest rates cannot be lowered further, the Federal Reserve might rely on________.

Accepted Answer

A)  federal government fiscal policy. 
B)  targeting the fed funds rate. 
C)  quantitative easing. 
D)  targeting the inflation rate. 
A)  federal government fiscal policy. 
B)  targeting the fed funds rate. 
C)  quantitative easing. 
D)  targeting the inflation rate.

Question 20

Credit-driven bubbles ________.

Accepted Answer

A)  occur exclusively within the financial sector 
B)  are more likely to be identified by central bank officials than by market participants 
C)  are best contained with a policy of high real interest rates 
D)  are harder to identify than expectations-driven bubbles 
A)  occur exclusively within the financial sector 
B)  are more likely to be identified by central bank officials than by market participants 
C)  are best contained with a policy of high real interest rates 
D)  are harder to identify than expectations-driven bubbles

Exam 15: Financial Crises and the Economy

President Franklin Delano Roosevelt declared a bank holiday, closing all U.S. banks in ________.

The notion that lenders must select from a pool of bad credit risks, because the most undesirable borrowers are those that most actively seek out a loan is known as the________.

How is asymmetric information related to asset-price bubbles?

Why is responding to a financial crisis by bailing out financial institutions more effective than direct support of nonfinancial businesses?

The main reason that many businesses fail when the price level is falling is that ________.

The analysis of asymmetric information problems is called ________.

Which of the following statements is correct?

What is meant by the expectations channel of monetary transmission? How does it relate to the credit channel?

Assume that a firm has $100 million in real assets and $90 in real liabilities. If the price level falls by ten percent, the real value of liabilities would ________.

The key objective of purchases by the Federal Reserve of over $1 trillion worth of debt issued by private firms was ________.

An early sign that financial innovation might be leading toward a financial crisis is ________.

Attempts by a central bank to increase bank deposits without a decrease in nominal interest rates are referred to as ________.

A prominent aspect of the Great Depression of the 1930s, but not of the recent Great Recession, is ________.

The financial innovation of numerical credit scoring contributed to the ________.

A $100 million loan with a haircut of four percent requires collateral valued at ________.

How can improvements in statistical analysis of financial data cause the amount of information in financial markets to decline?

The risk that a borrower has a greater understanding about their potential future behavior that a potential lender is known as ________.

The difference between the interest rate on loans to households and firms and the rate on completely safe assets is known as ________.

In the event that nominal interest rates cannot be lowered further, the Federal Reserve might rely on________.

Credit-driven bubbles ________.

The Policy and Practice of Macroeconomics

Measuring Macroeconomic Data

Aggregate Production and Productivity

Saving and Investment in Closed and Open Economies

Money and Inflation

The Sources of Growth and the Solow Model

Drivers of Growth: Technology, Policy, and Institutions

Business Cycles: an Introduction

The Is Curve

Monetary Policy and Aggregate Demand

Aggregate Supply and the Phillips Curve

The Aggregate Demand and Supply Model

Macroeconomic Policy and Aggregate Demand and Supply Analysis

The Financial System and Economic Growth

Fiscal Policy and the Government Budget

Exchange Rates and International Economic Policy

Consumption and Saving

Investment

The Labor Market, Employment, and Unemployment

The Role of Expectations in Macroeconomic Policy

Modern Business Cycle Theory

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