Deck 17: Crises and Consequences

Question 1

Which of the following is an example of maturity transformation?

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.

Answer 1

C

Question 2

Most funds received by depository banks are:

A)borrowed from the U.S. Treasury.
B)deposits of individuals' savings.
C)initially in the form of foreign currency.
D)loans to the bank from businesses.

Answer 2

B

Question 3

A shadow bank is a:

A)branch of the main office of a bank.
B)bank that is operated by a shadow government.
C)financial firm that is not closely watched or effectively regulated.
D)a credit union or a savings and loan institution.

Answer 3

C

Question 4

Lehman Brothers was established by Henry Lehman in 1844 as a(n):

A)investment bank.
B)commercial bank.
C)dry goods store.
D)saloon.

Question 5

The existence of banks:

A)increases the severity of the trade-off between rate of return and liquidity.
B)decreases the severity of the trade-off between rate of return and liquidity.
C)has no effect on the trade-off between rate of return and liquidity.
D)decreases both the rate of return and the liquidity of its customers' assets.

Question 6

Depository banks borrow from depositors primarily on a _____ basis and lend to others on a _____ basis.

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

Question 7

One of the first forms of paper money emerged when:

A)the Federal Reserve was formed in the early 1900s.
B)the government of Rome printed money to pay Roman soldiers.
C)customers who had deposited gold and silver with medieval goldsmiths began to use their receipts to pay for purchases.
D)Europe adopted the euro.

Question 8

Which of the following is an example of maturity transformation?

A)Jordan borrows $15,000 to buy a car.
B)Aaron buys new running shoes and pays for them with his American Express credit card.
C)Angela gives Russell $100 in cash for a graduation gift.
D)Tyler lends $1,000 to his roommate Nick for a year.

Question 9

The first bankers were:

A)farmers.
B)merchants who engaged in foreign trade.
C)insurance companies.
D)goldsmiths.

Question 10

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

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

Question 11

Most of a bank's assets are:

A)loans from the Federal Reserve.
B)loans to the Federal Reserve.
C)loans to its customers.
D)customers' deposits.

Question 12

Since the early 1980s, shadow banks have increased because they:

A)are not subject to capital requirements and reserve requirements.
B)offer online bill payment to their depositors.
C)pay lower interest rates on their deposits than commercial banks.
D)offer lower interest rates on their commercial loans than commercial banks.

Question 13

Investment banks differ from commercial banks because commercial banks _____, but investment banks _____.

A)are allowed to advertise; must not advertise.
B)can have offices only in one state; can have offices in many countries
C)do not sell foreign currencies; sell foreign currencies
D)accept deposits from customers; do not accept deposits

Question 14

A financial intermediary that provides liquid assets in the form of deposits to savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n):

A)insurance company.
B)bank.
C)pension fund.
D)hedge fund.

Question 15

Shadow banks differ from commercial banks because shadow banks:

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 16

Maturity transformation is converting _____ liabilities into _____ assets.

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

Question 17

When shadow banks engage in maturity transformation, they raise funds by _____ and invest in _____.

A)issuing stock; stock of other companies
B)selling bonds; Treasury bills
C)borrowing in short-term credit markets; longer-term speculative investments
D)borrowing in long-term credit markets; short-term speculative investments

Question 18

Most of a bank's short-term liabilities are:

A)loans from the Federal Reserve.
B)loans from the U.S. Treasury.
C)loans to its customers.
D)customers' deposits.

Question 19

Without banks, people would:

A)hold more of their wealth as cash.
B)hold less of their wealth as cash.
C)invest most of their wealth in real estate.
D)earn higher rates of return and enjoy more liquidity.

Question 20

The primary reason for Lehman Brothers' bankruptcy in September 2008 was its investment in:

A)subprime mortgages.
B)bonds of foreign governments.
C)U)S. government bonds.
D)risky stocks.

Question 21

A sudden and widespread disruption of financial markets that occurs when people lose faith in the liquidity of financial institutions and markets is a(n):

A)asset bubble.
B)maturity transformation.
C)financial panic.
D)debt overhang.

Question 22

In an asset bubble:

A)depositors withdraw their deposits from banks until the bank fails.
B)the price of an asset is pushed to an unreasonably high level because of expectations of further price gains.
C)the price of an asset falls because demand for the asset is so high.
D)savers and investors engage in maturity transformation by long-term borrowing and making short-term loans to take advantage of interest rate increases.

Question 23

In a bank run:

A)the bank has a surplus of deposits and must turn customers away.
B)bank customers try to withdraw their deposits.
C)the bank runs out of money to lend to customers.
D)the bank runs out of profitable investments for the funds of its depositors.

Question 24

A vicious downward spiral among banks in which each institution's failure increases the likelihood that another will fail is a(n):

A)asset bubble.
B)maturity transformation.
C)multiplier effect.
D)financial contagion.

Question 25

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

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 26

The panic of 1873 began when:

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 27

The repo 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 28

The banking panics in 1873 and 1893 were caused by:

A)asset bubbles in real estate.
B)overbuilding in the railroad industry.
C)gold rushes.
D)overly strict regulation of the banking industry.

Question 29

Lehman Brothers was forced to declare bankruptcy in September 2008, when:

A)Barack Obama was elected president.
B)it purchased Bear Stearns, another investment bank.
C)one of its short-term lenders, JPMorgan Chase, demanded $5 billion in cash as collateral for loans it had made to Lehman.
D)the European Union abandoned the euro.

Question 30

Which of the following is intended to prevent bank runs?

A)the Sherman Anti-Trust Act
B)regulation Q, which prohibits banks from paying interest on demand deposits
C)deposit insurance
D)maturity transformation

Question 31

Before 2010 and passage of Dodd-Frank, shadow banks offered their customers a higher rate of return than commercial banks because shadow banks _____, but commercial banks _____.

A)could pay interest on deposits; could not.
B)were allowed to invest in stocks of foreign corporations; could invest only in stocks of U.S. corporations.
C)had to hold a large amount of reserves and capital; were not required to keep as much in reserve
D)were not subject to reserve and capital requirements; had to hold reserves and meet capital requirements

Question 32

In the United States during the time between the Civil War and the Great Depression:

A)banks were completely unregulated.
B)bank runs rarely occurred.
C)there was no insurance on bank deposits.
D)there were very few national banks.

Question 33

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

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

Question 34

A banking crisis occurs:

A)whenever there is an asset bubble.
B)if shadow banks begin to accept deposits.
C)when banks engage in maturity transformation by accepting short-term deposits and converting them into long-term loans or investments.
D)when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail.

Question 35

During the Great Depression in the early 1930s:

A)bank deposits increased by 50% each year.
B)bank deposits decreased by 35%.
C)people refused to hold currency.
D)bank runs were not a problem.

Question 36

Which of the following is designed to prevent bank runs?

A)debt overhang
B)deposit insurance
C)credit crunch
D)shadow banks

Question 37

In a vicious cycle of deleveraging, financial institutions:

A)sell assets at a deep discounts.
B)sell assets at unreasonably high prices.
C)offer higher interest rates to their depositors.
D)buy assets at unreasonably high prices.

Question 38

The asset bubble that caused the savings and loan crisis of the 1980s was in:

A)gold.
B)oil futures.
C)stocks of Internet companies.
D)commercial real estate.

Question 39

All of the following are regulations designed to prevent bank runs EXCEPT:

A)asset bubbles.
B)capital requirements.
C)reserve requirements.
D)provisions that allow banks to borrow from the Fed's discount window.

Question 40

A shadow bank engages in maturity transformation by:

A)accepting short-term deposits and making short-term loans.
B)accepting long-term deposits and making long-term loans.
C)borrowing short term and lending or investing long term.
D)borrowing long term and lending or investing short term.

Question 41

Debt overhang is the result of:

A)maturity transformation.
B)a vicious cycle of deleveraging.
C)falling unemployment.
D)rising inflation.

Question 42

Severe banking crises usually lead to:

A)low levels of unemployment.
B)high levels of unemployment.
C)high levels of saving and investment spending.
D)rapid growth of real GDP per capita.

Question 43

Which of the following is NOT a reason banking crises usually lead to recessions?

A)low unemployment rates and high inflation rates
B)credit crunches
C)debt overhang
D)loss of effectiveness of monetary policy

Question 44

During the early 1930s, approximately _____ of the banks in the United States failed.

A)75%
B)40%
C)10%
D)3%

Question 45

What did the panic of 1873 and the panic of 1893 have in common?

A)They were both caused by the Federal Reserve's failure to implement the proper monetary policy.
B)They were both caused by a real estate bubble.
C)They both led to large increases in real GDP and decreases in the unemployment rate.
D)They were both caused by overbuilding in the railroad industry.

Question 46

Who wrote A Monetary History of the United States?

A)George and Jeb Bush
B)Bill Clinton and Al Gore
C)John Maynard Keynes and Karl Marx
D)Milton Friedman and Anna Schwartz

Question 47

In the early 1990s banking crises occurred in Finland, Sweden, and Japan because:

A)of real estate bubbles in each country.
B)the central banks of these countries were prohibited from conducting monetary policy.
C)the value of the euro fell to historically low levels.
D)there were many runs on banks.

Question 48

A credit crunch causes a recession because:

A)potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.
B)banks have a surplus of funds to loan, so interest rates fall to very low levels.
C)unemployment falls to very low levels, causing a problem of inflation.
D)interest rates are so low that investors' incomes fall, and they decrease their spending.

Question 49

Following the banking crises of the early 1930s real GDP _____ and the price level _____.

A)increased; increased at a rapid pace
B)increased; decreased
C)decreased; decreased
D)decreased; increased

Question 50

Which of the following countries was known as the Celtic Tiger during much of the 1990s and 2000s?

A)China
B)France
C)India
D)Ireland

Question 51

To stabilize the banking crisis in Ireland the:

A)Irish government guaranteed all bank debt.
B)European Union central bank revalued the euro.
C)European Union central bank devalued the euro.
D)Irish government declared a bank holiday for several weeks.

Question 52

To put an end to the vicious cycle of bank failures during the early 1930s:

A)President Franklin Roosevelt declared a bank holiday, temporarily closing all banks.
B)the Federal Reserve System was established.
C)a system of shadow banks was developed to replace the troubled commercial banks.
D)the government nationalized all commercial banks.

Question 53

Following a severe banking crisis, the average length of time that it takes the unemployment rate to begin to fall is _____ years.

A)2
B)4)8
C)10.5
D)25

Question 54

As a consequence of the Irish banking crisis:

A)the budget surplus of the Irish government is growing to record levels.
B)the Irish government had to pay high interest rates on money it borrowed in international markets, and its solvency was in question.
C)unemployment fell to less than 3%.
D)Ireland has been forced to leave the European Union.

Question 55

Ireland's rapid growth came to a halt in 2008 because:

A)the potato crop was destroyed by bad weather.
B)the central bank of Ireland refused to accept the euro.
C)of a real estate bubble.
D)of the failures of many shipping companies.

Question 56

Following a severe banking crisis, the average increase in the unemployment rate is:

A)25%.
B)20%.
C)10%.
D)7%.

Question 57

The panic of 1893 began when:

A)the Treaty of Paris was signed, ending the American Revolution.
B)the Titanic sank.
C)real estate developers built too many office buildings.
D)the Philadelphia and Reading Railroad failed.

Question 58

In A Monetary History of the United States, Friedman and Schwartz argued that:

A)the United States should never have engaged in free trade with China.
B)the Federal Reserve could have prevented the banking crisis and the Great Depression.
C)the United States should return to the gold standard.
D)an electronic banking system is likely to contribute to the severity of financial crises.

Question 59

What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common?

A)Each was followed by a period of record high growth rates of real GDP.
B)Both were ended by aggressive monetary policies of the central bank.
C)Each was followed by a deep recession and slow recovery.
D)Both were caused by a real estate bubble.

Question 60

The "wholesale" funding that Irish banks used for real estate loans came primarily from:

A)the European Union central bank.
B)long-term, low-interest loans from the Irish government.
C)bank deposits of individuals.
D)short-term loans from other banks and private investors.

Question 61

Which of the following is an action of central banks and governments to lessen the severity of a banking crisis?

A)establishing shadow banks
B)guaranteeing bank deposits
C)encouraging asset bubbles
D)opening a liquidity trap

Question 62

In a banking crisis, banks usually:

A)see an increase in the value of their assets.
B)lend out all of their excess reserves.
C)hold more excess reserves than usual.
D)offer discounts to customers to give them the incentive to borrow money.

Question 63

When the central bank acts as a lender of last resort, it:

A)raises reserve requirements.
B)reduces reserve requirements.
C)provides a liquidity trap.
D)provides funds to financial institutions that cannot borrow from the private credit markets.

Question 64

Consumers and businesses with debt overhang are likely to _____ their borrowing and _____ their spending.

A)increase; decrease
B)increase; increase
C)decrease; decrease
D)decrease; increase

Question 65

During the financial crisis of 2008, the Fed:

A)was closed for a three-week bank holiday by President George W. Bush.
B)remained open but was severely limited in its operations.
C)was merged with the Treasury Department to increase its power to deal with the crisis.
D)expanded its operations by lending to institutions other than commercial banks and buying financial assets other than Treasury bills.

Question 66

Which of the following is an action of central banks and governments to lessen the severity of a banking crisis?

A)maturity transformation
B)relaxing bank capital requirements
C)acting as a lender of last resort
D)opening a liquidity trap

Question 67

Debt overhang results in _____ levels of debt and assets with _____ values.

A)reduced; higher
B)increased; higher
C)reduced; lower
D)increased; lower

Question 68

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

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 69

By acting as a lender of last resort, the central bank:

A)prevents a loss of confidence in banks and avoids bank runs.
B)keeps interest rates high so that spending increases.
C)increases the amount of reserves that a bank is required to hold.
D)may keep inflation low but will likely drive unemployment up.

Question 70

The purpose of open market purchases is to:

A)decrease the government budget deficit.
B)increase the government budget deficit.
C)increase consumer and investment spending.
D)decrease consumer and investment spending.

Question 71

Following the 2008 financial crisis, commercial banks:

A)borrowed an amount equal to 14 times their total reserves before the crisis.
B)avoided borrowing from the Fed.
C)preferred to sell large amounts of their assets to raise cash to avoid bank runs rather than borrow from the Fed.
D)insisted that market forces be allowed to work to resolve the crisis rather than accept loans from the Fed.

Question 72

When the Fed conducts open market purchases from banks, interest rates are most likely to:

A)decrease.
B)increase.
C)remain constant.
D)fluctuate randomly.

Question 73

When the Fed purchases short-term government securities from banks, the primary effect on excess reserves is that they:

A)decrease.
B)increase.
C)remain constant.
D)fluctuate randomly.

Question 74

By acting as a lender of last resort, the central bank:

A)causes a vicious cycle of deleveraging.
B)prevents a vicious cycle of deleveraging.
C)is decreasing the amount of reserves that a bank is required to hold.
D)may keep interest rates low but will likely drive unemployment up.

Question 75

Debt overhang often causes a recession because businesses and consumers with a _____ level of debt _____ their spending.

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

Question 76

The recession that began in 1929 turned into the Great Depression primarily because of:

A)the banking crisis.
B)the beginning of World War II.
C)taxes that were too low to finance government programs to end the recession.
D)powerful labor unions that demanded high wages and generous benefits.

Question 77

Before the Great Depression in the 1930s, the government:

A)nationalized all banks that were close to failure.
B)allowed banks to fail, believing that free-market forces should be allowed to work.
C)lent money to banks that were in poor financial condition.
D)guaranteed deposits of individuals.

Question 78

When the government guarantees a troubled bank's liabilities:

A)the bank is merged into the Federal Reserve System and becomes a Federal Reserve bank.
B)the owners of the bank must pay a fee to receive the guarantee.
C)the government takes over the bank temporarily and then reprivatizes the bank by selling it to private investors.
D)the bank is permanently closed.

Question 79

The Fed usually responds to a recession by:

A)buying short-term government debt from banks.
B)selling short-term government debt to banks.
C)raising interest rates.
D)increasing reserve requirements.

Question 80

When borrowers don't respond to short-term interest rates of zero, the economy is in:

A)a liquidity trap.
B)hyperinflation.
C)an asset bubble.
D)maturity transformation.