Deck 5: Financial Markets, financial Regulation, and Economic Instability

Question 1

Positive output gap indicates that

A)the actual real GDP is above natural real GDP.
B)the actual real GDP is below natural real GDP.
C)nominal GDP is above real GDP.
D)nominal GDP is below real GDP.

Answer 1

the actual real GDP is above natural real GDP.

Question 2

During recent Global Economic Crises,consumers' real wealth in the U.S.declined as a result of

A)the stock market crash,pricking of the housing bubble,and the increased household borrowing.
B)the expansionary fiscal policy,and the expansionary monetary policy.
C)the lack of fiscal and monetary policy coordination.
D)the banks' decision not to issue additional loans.

Answer 2

the stock market crash,pricking of the housing bubble,and the increased household borrowing.

Question 3

Ceteris paribus,bond price and bond yields are

A)inversely related.
B)positively related.
C)not related.
D)associated but not correlated.

Answer 3

inversely related.

Question 4

The wealth effect refers to

A)the impact of household real wealth on consumption,savings,and the IS curve.
B)the impact of household real wealth on money,prices,and the LM curve.
C)the impact of household real wealth on short term and long term interest rates.
D)the impact of household real wealth on aggregate supply curve.

Question 5

Teaser interest rates refer to

A)the initial rates that are typically below market rate and are offered by lenders to entice the clients to borrow.
B)mortgage rates.
C)rates charged on all subprime mortgages.
D)none of the above.

Question 6

When actual real GDP is below natural real GDP,we say that

A)the output gap is positive.
B)the output gap is negative.
C)the output gap has been eliminated.
D)the output gap cannot be calculated.

Question 7

Financial markets are

A)institutions that make loans to borrowers and obtain funds from savers.
B)organized exchanges where securities and financial instruments are bought and sold.
C)organized exchanges where currencies are traded.
D)institutions that regulate financial instruments.

Question 8

When actual real GDP is above natural real GDP,we say that

A)the output gap is positive.
B)the output gap is negative.
C)the output gap has been eliminated.
D)the output gap cannot be calculated.

Question 9

Funds are channeled from savers to borrowers directly through ________ and indirectly through ________.

A)financial markets;financial intermediaries
B)financial intermediaries;financial markets
C)main banks;branches
D)brokers;' agents

Question 10

During recent Global Economic Crises,consumers' wealth in the U.S.declined as a result of all of the following EXCEPT

A)the stock market crash.
B)pricking of the housing bubble.
C)increased household borrowing.
D)aggressive fiscal policy.

Question 11

Institutions that make loans to borrowers and obtain funds from savers are called

A)financial markets.
B)financial intermediaries.
C)financial conglomerates.
D)financial branches.

Question 12

Financial intermediaries are

A)institutions that regulate financial instruments.
B)organized exchanges where currencies are traded.
C)organized exchanges where securities and financial instruments are bought and sold
D)institutions that make loans to borrowers and obtain funds from savers.

Question 13

Mortgages issued to individuals with low incomes and poor credit history are called

A)credit mortgages.
B)teaser mortgages.
C)subprime mortgages.
D)income mortgages.

Question 14

Negative output gap indicates that

A)the actual real GDP is above natural real GDP.
B)the actual real GDP is below natural real GDP.
C)nominal GDP is above real GDP.
D)nominal GDP is below real GDP.

Question 15

The output gap of zero indicates that

A)nominal GDP is equal to Real GDP.
B)GDP is equal to GNP.
C)the balance between unemployment and inflation has been reached.
D)actual real GDP is equal to natural real GDP.

Question 16

Ceteris paribus,if bond prices rise,then

A)there is no effect on bond yields.
B)bond yields will increase as well.
C)bond yields will fall
D)the Federal reserve must be pursuing contractionary monetary policy.

Question 17

Subprime mortgages refer to the mortgages issued

A)by low rating financial institutions.
B)at an interest rate below prime rate.
C)to borrowers with low incomes and poor credit histories.
D)by government

Question 18

Organized exchanges where securities and financial instruments are bought and sold are called

A)financial intermediaries.
B)financial markets.
C)banks.
D)financial branches.

Question 19

Funds are channeled from savers to borrowers indirectly through ________ and directly through ________.

A)financial intermediaries;financial markets
B)financial markets;financial intermediaries
C)main banks;branches
D)broker;agents

Question 20

The impact of financial markets on the economy comes partly through

A)the substitution effect.
B)the wealth effect.
C)the international trade effect.
D)the travel effect.

Question 21

Past centuries witnessed two important stock price bubbles.The first one occurred between ________,and the second one occurred between ________.

A)1927-29;2006-08
B)1973-76;2006-08
C)1965-73;1996-2000
D)1927-29;1996-2000

Question 22

The common feature of the Great Depression and the Global Economic Crisis is

A)that they were preceded by an asset price bubble.
B)the active role of the Government before the crises.
C)the active role of the FED before the crises.
D)the immediate and the aggressive response by both government and the FED.

Question 23

Securitization is

A)the process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments.
B)the process of securing loans at the bank.
C)the process of combining assets and debt into a pool of individual contracts and then selling new financial instruments.
D)the process that FDIC uses to insure.

Question 24

In addition to being subject to the Fed's reserve requirements,the banks are also required to maintain a capital requirement,which is

A)the ratio of its deposits to its reserves.
B)the ratio of its loans to its reserves.
C)the ratio of its total assets to its total liabilities.
D)the ratio of its equity to its total assets.

Question 25

The main differences between the bank and the nonbank institutions include all of the following EXCEPT

A)banks are regulated by the Fed while nonbank institutions are not.
B)banks obtain the funds to buy investment by attracting deposits while nonbank institutions borrow funds.
C)banks hold more equity then nonbank institutions.
D)banks' balance sheets include assets and liabilities while nonbank institutions' balance sheets include only liabilities.

Question 26

The ratio of the liabilities of a financial institution to equity capital is called

A)leverage.
B)assets.
C)liabilities.
D)equity.

Question 27

The process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments is called

A)Securitization.
B)Leveraging.
C)Sub-priming.
D)NINJA loaning.

Question 28

Referring to a bank's t-account,equity refers to

A)the difference between total assets and total liabilities.
B)the sum of total assets and total liabilities.
C)the ratio of the total assets and total liabilities.
D)none of the above.

Question 29

The securities,such as stocks or bonds,constitutes a(n)________ for the borrowers and a (n)________ for the saver.

A)asset;liability
B)asset;debt
C)liability;asset
D)debt or an asset;liability or an asset

Question 30

Referring to a bank's t-account,the difference between total assets and total liabilities is called

A)leverage.
B)reserves.
C)deposits.
D)equity.

Question 31

Leverage refers to

A)the ratio of total assets of a financial institution to total liabilities.
B)the ratio of the liabilities of a financial institution to equity capital..
C)the ratio of equity capital of a financial institution to the liabilities.
D)the ratio of the debt of a financial institution to liabilities.

Question 32

The securities,such as stocks or bonds,constitute a(n)________ for the savers and a(m)________ for the borrowers.

A)asset;liability
B)debt;assets
C)liability;asset
D)debt or an asset;liability or an asset

Question 33

According to Gordon,the three main ingredients in the recent U.S.housing bubble are

A)low interest rates,saving glut,and financial innovation.
B)high interest rates,lack of savings,and financial innovation.
C)financial innovation,expansionary fiscal policy,and capital outflow.
D)capital outflow,budget deficit,and trade deficit.

Question 34

Bank equity is also referred to as

A)bank deposits.
B)bank reserves.
C)bank capital.
D)bank assets.

Question 35

The average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate is called

A)risk premium.
B)term premium.
C)FED's premium.
D)monetary premium.

Question 36

In the IS-LM Model,assuming downward sloping IS curve and upward sloping LM curve;increase in consumers' wealth is going to

A)cause a movement along the IS curve.
B)cause a rightward shift of the IS curve.
C)cause a leftward shift of the LM curve.
D)cause a rightward shift of the LM curve.

Question 37

According to Gordon,all of the following are important ingredients in the recent U.S.housing bubble EXCEPT

A)low interest rates.
B)saving glut.
C)financial innovation.
D)trade deficit.

Question 38

In the IS-LM model,assuming downward sloping IS curve and upward sloping LM curve,reduction in consumers' wealth is going to

A)cause a movement along the IS curve.
B)cause a leftward shift of the IS curve.
C)cause a leftward shift in the LM curve.
D)cause a rightward shift of the LM curve.

Question 39

The ratio of bank's equity to its total assets is called

A)capital requirements.
B)leverage.
C)assets requirement.
D)risk.

Question 40

Price bubble occurs when

A)price of an asset soars far above "fundamentals" like corporate earning or household income.
B)people can no longer afford to purchase an asset.
C)economy enters recessionary period.
D)economy experiences prolonged and slow recovery.

Question 41

The difference between the corporate bond rate and the risk-free rate of Treasury bonds is called

A)risk premium.
B)term premium.
C)Fed's premium.
D)monetary premium.

Question 42

In the recent Global Economic Crisis,the end of cash-out mortgage refinancing caused

A)LM curve to shift to the right.
B)LM curve to shift to the left.
C)IS curve to shift to the left.

Question 43

________ occurs when a central bank purchases assets with the intention not of lowering the short-term interest rate,which is already at zero,but with the purpose of increasing bank reserves.

A)Quantitative easing
B)Fiscal incrementing
C)Loan originating
D)Fiscal easing

Question 44

If the intersection of the IS curve with the horizontal axis comes at a level of output below the natural level of output,lowering interest rate to zero will

A)bring economy back to natural output.
B)not bring the economy back to natural output.
C)will have inflationary effects on the economy.
D)will cause saving rates to increase.

Question 45

In the recent Global Economic Crisis,the negative wealth effect from a 50 percent decline in the stock market caused

A)LM curve to shift to the right.
B)LM curve to shift to the left.
C)IS curve to shift to the left.

Question 46

In the recent Global Economic Crisis,all of the following are causes that pushed the IS curve to the left EXCEPT

A)the negative wealth effect from the collapse of the housing bubble.
B)the end of cash-out mortgage refinancing.
C)growing unwillingness of banks and nonbank financial institutions to grant loan.
D)slow and minimal response of the U.S.government.

Question 47

In the recent Global Economic Crisis,the growing unwillingness of banks and non bank financial institutions to grant loans caused

A)LM curve to shift to the right.
B)LM curve to shift to the left.
C)IS curve to shift to the left.

Question 48

As shown by the IS-LM model,there are two reasons that the Fed can lose control of the economy.One of these reasons is

A)federal funds rate can never reach zero percent.
B)zero federal funds rate is not sustainable.
C)household and business borrowers do not base their decision to borrow on interest rates.
D)that the zero federal funds rate achieved by the Fed is irrelevant to household and business borrowers.

Question 49

If the intersection of the IS curve with the horizontal axis comes at a level of output below the natural level of output,the Fed

A)can easily bring the economy back to the full-employment level of output.
B)loses control of the economy.
C)must use contractionary model policy to correct economic problem.
D)must decrease money supply and ignore interest rates.

Question 50

Risk Premium refers to

A)the average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate.
B)the average difference over a long period of the interest rate on short-term financial instruments and the interest rate on the discount rates.
C)the difference between the corporate bond rate and the risk-free rate of Treasury bonds.
D)the difference between prime rate and the discount rate.

Question 51

In the recent Global Economic Crisis,the negative wealth effect caused

A)LM curve to shift to the right.
B)LM curve to shift to the left.
C)IS curve to shift to the left.

Question 52

Term premium refers to

A)the average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate.
B)the average difference over a long period of the interest rate on short-term financial instruments and the interest rate on the discount rate.
C)the difference between the corporate bond rate and the risk-free rate of Treasury bonds.
D)the difference between prime rate and the discount rate.

Question 53

There are no questions for this section.