Deck 10: The Great Recession: a First Look

Question 1

According to The Economist, by 2006 ________ of new home loans were ________ loans.

A) one-half; ARM one-third
B) one-fifth; subprime
C) only 1 percent; traditional 30-year-fixed
D) almost all; inflation-indexed
E) three-fourths; subprime

Answer 1

B

Question 2

Other recent financial crises occurred in:

A) Mexico in 1994
B) India in 1972
C) Russia in 2005
D) China in 1994
E) Norway in 2000

Answer 2

A

Question 3

Between May 2004 and May 2006, the Fed ________ its interest rate ________.

A) raised; from 1.25 percent to 5.25 percent
B) lowered; from 5.25 percent to 0 percent
C) kept; fixed at 3.25 percent
D) lowered; from 6.5 percent to 1 percent
E) The Fed does not control interest rates.

Answer 3

A

Question 4

The Great Recession began in ________ and ended in ________.

A) December 2007; June 2009
B) December 2008; June 2010
C) May 2008; March 2010
D) June 2007; December 2009
E) June 2007; June 2009

Question 5

In ________, housing prices collapsed following a decade of rapid increase.

A) 2009
B) 1995
C) 2006
D) 2008
E) 2001

Question 6

Which of the following financial institutions converted to bank holding companies in the financial collapse?

A) Wells Fargo
B) Goldman Sachs
C) The National Bureau of Economic Holdings
D) Citicorp
E) the Federal Reserve

Question 7

What declined during the Great Recession?

A) the unemployment rate
B) the median duration of unemployment
C) the federal government deficit
D) the size of the Fed's portfolio
E) world GDP

Question 8

The name given to low quality loans is:

A) fixed income loans
B) opportunity loans
C) ARM 7/1
D) subprime loans
E) "sucker loans"

Question 9

When was the deepest recession since the end of World War II?

A) 1981-1982
B) 2007-2009
C) 1973-1975
D) 1948-1949
E) 1969-1970

Question 10

During the Great Recession, the unemployment rate peaked at:

A) 12.1 percent
B) 9.5 percent
C) 10 percent
D) 25.8 percent
E) 6.7 percent

Question 11

Which of the following is NOT a securitized asset?

A) mortgage-backed securities
B) asset-backed commercial paper
C) collateralized debt obligations
D) commercial bonds
E) CDOs

Question 12

Which country did NOT experience a financial crisis in the 1990s?

A) Mexico
B) Russia
C) Brazil
D) India
E) Argentina

Question 13

The global savings glut can be defined as:

A) the increase in foreign savings moving into the United States in search of investment opportunities
B) the rapid increase in personal saving rates in the United States leading to increased lending to foreign countries
C) the response of U.S. savings to low interest rates in the early 2000s
D) the decline in saving rates globally
E) the precautionary savings increase in response to the establishment of the euro

Question 14

Between the middle of 2006 and the first quarter of 2012, the national index for the U.S. housing market:

A) declined by about 10.1 percent
B) declined by about 42 percent
C) increased by about 33 percent
D) was flat
E) grew at the rate of inflation

Question 15

What incentive did banks have to give large loans to households with relatively little income?

A) rapidly rising housing prices
B) low interest rates
C) high rates of inflation
D) high unemployment rates
E) government guarantees

Question 16

What is the fed funds rate?

A) interest rate charged by banks to their best customers
B) ideal inflation rate
C) interest rate charged by banks for overnight loans
D) interest rate suggested by the Taylor rule
E) sustainable level of federal budget deficit

Question 17

The housing bubble was probably NOT fueled by:

A) loosening lending standards
B) high unemployment
C) low interest rates
D) subprime lending
E) demand pressures

Question 18

Which investment bank collapsed in September 2008?

A) Merrill Lynch
B) Goldman Sachs
C) Lehman Brothers
D) Wells Fargo
E) Barclays

Question 19

Federal debt as a ratio to GDP ________ between 2007 and 2012, from ________ percent to ________ percent.

A) doubled; 36; 72
B) tripled; 27; 81
C) fell; 82; 41
D) doubled; 80; 160
E) tripled; 10; 30

Question 20

Securitization is defined as:

A) bolstering defense spending
B) making it more difficult to enter the United States illegally
C) creating incentives for firms to protect proprietary information
D) disallowing the use of collateral for loans
E) lumping large numbers of financial instruments together and selling pieces to different types of investors

Question 21

The acronym "CDO" stands for:

A) constant deficit obligation
B) collateralized debt obligation
C) congressional debt organization
D) corporate deposit opportunities
E) capital default ownership

Question 22

When the Fed began to raise the federal funds rate in 2004:

A) investors quickly sold U.S. treasuries
B) default on subprime mortgages increased and housing prices fell
C) inflation picked up steam
D) housing prices recovered and grew, but more slowly than in the previous 10 years
E) stock markets retreated and fell to all-time lows

Question 23

The "flight to safety" in the fall of 2007 led investors to ________, which led to ________.

A) buy BAA rated corporate bonds; a decline in stock prices
B) buy T-bills; a rise in the spread between LIBOR rates and T-bill yields
C) purchase stocks; a sharp increase in the S&P 500
D) oil futures; a spike in natural gas prices
E) buy foreign exchanges; a rapid appreciation of the euro

Question 24

Part of the rapid increase in oil prices was due to:

A) declining demand in OECD countries
B) falling supplies from OPEC countries
C) lower inflation expectations in the United States
D) the financial meltdown
E) increasing demand in China

Question 25

From a low of ________ percent in 2007, the unemployment rate rose to ________ percent by 2010.

A) 10; 25
B) 58; 63
C) 0; 7
D) 4.4; 10
E) 7; 12

Question 26

The increased spread between three-month LIBOR and three-month bond yields led to ________. This is a classic example of ________.

A) reduced lending; a liquidity crisis
B) a rush to buy bonds; an asset bubble
C) falling risk in financial markets; risk sharing
D) increased inflationary expectations; cost push inflation
E) increased consumer expenditure; the monetary transmission mechanism

Question 27

In mid-2008 oil prices:

A) stayed constant
B) rose by 40 percent
C) fell to $30 per barrel
D) rose to $140 per barrel
E) rose to $70 per barrel

Question 28

In contrast to the dot-com stock market bubble, the bursting of the housing bubble ________, implying ________.

A) affected almost every financial institution; the risk was well-diversified
B) affected a small number of investors; the risk was not well-diversified
C) hurt every household; households paid too high an interest rate
D) was attenuated by a quick response by the Fed; the Fed's policy was effective
E) increased household expenditures; it had little effect on the macroeconomy

Question 29

Which of the following financial institutions was taken over by the federal government?

A) Freddie Mac
B) Bank of America
C) Lehman Brothers
D) Merrill Lynch
E) Fifth Third Bank

Question 30

A supposition of mortgage securitization is that:

A) mortgages can be swapped for T-bills
B) the federal government guarantees all loans
C) all the mortgages were "high quality"
D) the underlying assets are rated AAA
E) a large fraction of loans will not go bad at the same time

Question 31

In addition to oil price increases in 2008:

A) natural gas prices fell
B) the interest rate premium fell
C) commodity prices also rose
D) inflation remained unchanged
E) aggregate supply increased

Question 32

In the middle of 2009, ________; by February 2010, ________.

A) over 8 million jobs were lost; short-run output bottomed out at over -6 percent
B) short-run output bottomed out at below -7 percent; over 8 million jobs were lost
C) inflation was 5 percent; the unemployment rate was 12 percent
D) the federal funds rate was 5 percent; it had fallen to 1 percent
E) unemployment fell to 8 percent; home sales were rising steadily

Question 33

The acronym "TARP" stands for:

A) Total Assistance for Retired Persons
B) Tax and Revenue Program
C) Troubled Asset Relief Program
D) Treasury Asset Risk Persistence
E) Total Asset Rate Possibility

Question 34

The ________ was hastily designed to ________ in September 2008.

A) Troubled Asset Relief Program; prevent financial collapse
B) American Recovery and Reinvestment Act; prevent fiscal collapse
C) New Deal; prevent tax revenues from falling
D) Savings and Loan bank bailout; prevent declining mortgage applications
E) Sherman Antitrust Act; reduce commercial banks' power over financial markets

Question 35

Short-run output ________ in the last quarter of 2008 and ________ by the middle of 2009.

A) growth was flat; recovered to a modest 1.2 percent
B) was positive; fell to -3 percent
C) turned negative; bottomed out at below -7 percent
D) equaled zero; fell to -2 percent
E) was rising; unemployment was 8 percent

Question 36

________ peaked at the end of ________. By February 2010, ________.

A) Total nonfarm employment; 2007; over 8 million jobs were lost
B) The unemployment rate; 2006; inflation was 0 percent
C) Median weeks of unemployment; 2007; the unemployment rate had fallen to 7 percent
D) Aggregate weekly hours; 2007; inflation was negative
E) The inflation rate; 2008; the unemployment rate had risen to 11 percent

Question 37

The goal of securitization is to:

A) lock a constant rate of return for up to 10 years
B) ensure one financial institution hold all the risk
C) spread risk by buying different classes of assets
D) sell paper to Fannie Mae and/or Freddie Mac
E) earn high returns for investors

Question 38

What is an indicator of the extent of risk in financial systems?

A) the difference between the unemployment rate and the natural rate of unemployment
B) falling commodity prices
C) the spread between the monthly U.S. T-bill yield and LIBOR rate
D) the spread between inflation-indexed and non-indexed U.S. bonds
E) the number of banks applying for federal assistance

Question 39

The majority of mortgage-backed securities were held by:

A) large commercial and investment banks
B) the Fed
C) the Federal government
D) large teacher pension funds
E) money market mutual funds

Question 40

In ________ , the Fed began to raise the federal funds rate in response to ________.

A) mid-2004; rising inflation
B) mid-2008; a bubble in stock markets
C) mid-2007; the decline in housing prices
D) mid-2000; rising unemployment rates
E) early 2009; rising inflation

Question 41

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, if reserve requirements are 3 percent and capital requirements are 10 percent, the bank meets:

A) reserve requirements but not capital requirements
B) neither reserve requirements nor capital requirements
C) both reserve and capital requirements
D) capital requirements but not reserve requirements
E) Not enough information is given.

Question 42

The following table shows real GDP and potential real GDP for the years 2000-2012. Refer to this table when answering
Table 10.1 ($ billions)
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
$$\begin{array} { c c c } \hline & \begin{array} { c } \text { Potential } \\\text { GDP }\end{array} & \text { Real GDP } \\\hline 2000 & 10,909.7 & 11,216.4 \\2001 & 11,304.5 & 11,337.5 \\2002 & 11,674.3 & 11,543.1 \\2003 & 12,003.6 & 11,836.4 \\2004 & 12,290.0 & 12,246.9 \\2005 & 12,569.2 & 12,623.0 \\2006 & 12,864.6 & 12,958.5 \\2007 & 13,177.7 & 13,206.4 \\2008 & 13,485.0 & 13,161.9 \\2009 & 13,745.4 & 12,758.0 \\2010 & 13,950.3 & 13,063.0 \\2011 & 14,166.6 & 13,299.1 \\2012 & 14,411.0 & 13,593.2 \\\hline\end{array}$$

-According to the data in Table 10.1, what years did the Bush administration enjoy an expansionary gap?

A) 2005 and 2006
B) 2007-2009
C) 2001, 2005, 2006
D) 2002, 2003, 2008
E) 2011-2012

Question 43

Which of the following countries did the financial crisis affect?

A) the United States
B) Germany
C) Japan
D) France
E) All of these answers are correct.

Question 44

The following table shows real GDP and potential real GDP for the years 2000-2012. Refer to this table when answering
Table 10.1 ($ billions)
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
$$\begin{array} { c c c } \hline & \begin{array} { c } \text { Potential } \\\text { GDP }\end{array} & \text { Real GDP } \\\hline 2000 & 10,909.7 & 11,216.4 \\2001 & 11,304.5 & 11,337.5 \\2002 & 11,674.3 & 11,543.1 \\2003 & 12,003.6 & 11,836.4 \\2004 & 12,290.0 & 12,246.9 \\2005 & 12,569.2 & 12,623.0 \\2006 & 12,864.6 & 12,958.5 \\2007 & 13,177.7 & 13,206.4 \\2008 & 13,485.0 & 13,161.9 \\2009 & 13,745.4 & 12,758.0 \\2010 & 13,950.3 & 13,063.0 \\2011 & 14,166.6 & 13,299.1 \\2012 & 14,411.0 & 13,593.2 \\\hline\end{array}$$

-According to the data in Table 10.1, about how much did short-run output fluctuations equal in 2001 and 2008, respectively?

A) -0.3 percent; -2.4 percent
B) 0.3 percent; -2.4 percent
C) -33 percent; 323.1 percent
D) 86.1 percent; 83.8 percent
E) Not enough information is given.

Question 45

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, what is the approximate leverage ratio of this bank?

A) 4.80
B) 1.21
C) 5.80
D) 0.83
E) Not enough information is given.

Question 46

In terms of loss of employment, which recession in the post-World War II period saw the greatest losses?

A) 2007-2009
B) 1981-1982
C) 2001
D) 1973-1975
E) 1953-1954

Question 47

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, if the value of this bank's investments decreases by $1,000, what is the bank's equity?

A) $1,000
B) $3,900
C) $3,100
D) $2,400
E) Not enough information is given.

Question 48

In a typical recession, generally only ________ expenditure rises.

A) investment
B) exports
C) imports
D) inflation
E) government

Question 49

The following table shows real GDP and potential real GDP for the years 2000-2012. Refer to this table when answering
Table 10.1 ($ billions)
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
$$\begin{array} { c c c } \hline & \begin{array} { c } \text { Potential } \\\text { GDP }\end{array} & \text { Real GDP } \\\hline 2000 & 10,909.7 & 11,216.4 \\2001 & 11,304.5 & 11,337.5 \\2002 & 11,674.3 & 11,543.1 \\2003 & 12,003.6 & 11,836.4 \\2004 & 12,290.0 & 12,246.9 \\2005 & 12,569.2 & 12,623.0 \\2006 & 12,864.6 & 12,958.5 \\2007 & 13,177.7 & 13,206.4 \\2008 & 13,485.0 & 13,161.9 \\2009 & 13,745.4 & 12,758.0 \\2010 & 13,950.3 & 13,063.0 \\2011 & 14,166.6 & 13,299.1 \\2012 & 14,411.0 & 13,593.2 \\\hline\end{array}$$

-According to the data in Table 10.1, when was the recession deepest?

A) 2001
B) 2003
C) 2009
D) 2008
E) Not enough information is given.

Question 50

The sharp swing in core inflation in 2008-2009 was due to:

A) movements in energy prices
B) the sharp decline in housing prices
C) There was no sharp swing in core inflation.
D) rapid increases in wages
E) rapidly rising unemployment

Question 51

Recent IMF studies project negative growth in:

A) Italy
B) Japan
C) the United Kingdom
D) China
E) Brazil

Question 52

According to the IMF, which of these countries experienced positive growth in 2009?

A) India
B) the United States
C) the United Kingdom
D) Italy
E) Brazil

Question 53

Which of the following are NOT assets on a bank's balance sheet?

A) loans
B) deposits
C) cash
D) reserves
E) investments

Question 54

The average decline in GDP growth for all recessions since 1950 is ________ percent, but for the Great Recession it was ________ percent.

A) -2.1; -6.1
B)-0.4; -31.4
C) -3.7; -1.7
D) -1.7; -4.7
E) 0; 2.2

Question 55

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, the bank's assets are equal to:

A) $9,000
B) $2,000
C) $11,600
D) -$700
E) Not enough information is given.

Question 56

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, this bank's liabilities are equal to:

A) $9,600
B) $11,600
C) -$2,000
D) $700
E) $3,400

Question 57

The following table shows real GDP and potential real GDP for the years 2000-2012. Refer to this table when answering
Table 10.1 ($ billions)
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
$$\begin{array} { c c c } \hline & \begin{array} { c } \text { Potential } \\\text { GDP }\end{array} & \text { Real GDP } \\\hline 2000 & 10,909.7 & 11,216.4 \\2001 & 11,304.5 & 11,337.5 \\2002 & 11,674.3 & 11,543.1 \\2003 & 12,003.6 & 11,836.4 \\2004 & 12,290.0 & 12,246.9 \\2005 & 12,569.2 & 12,623.0 \\2006 & 12,864.6 & 12,958.5 \\2007 & 13,177.7 & 13,206.4 \\2008 & 13,485.0 & 13,161.9 \\2009 & 13,745.4 & 12,758.0 \\2010 & 13,950.3 & 13,063.0 \\2011 & 14,166.6 & 13,299.1 \\2012 & 14,411.0 & 13,593.2 \\\hline\end{array}$$

-According to the data in Table 10.1, during which year was the economy in an expansion?

A) 2001
B) 2004
C) 2002
D) 2003
E) 2011

Question 58

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, the bank's assets are equal to ________ and liabilities are ________.

A) $9,600; $11,600
B) -$2,000; $2,000
C) $6,800; $7,500
D) $11,600; $9,600
E) Not enough information is given.

Question 59

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, the bank's net worth is equal to:

A) $3,400
B) -$2,000
C) $2,000
D) -$700
E) Not enough information is given.

Question 60

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-In Table 10.2, Column A is bank ________ and Column B is bank ________.

A) assets; liabilities
B) liabilities; assets
C) on-balance sheet activity; off-balance sheet activity
D) "shadow" activity; "open air" activity
E) Not enough information is given.

Question 61

In the recent financial crisis, the banks' problems arose from:

A) bank runs
B) revaluation of loans
C) a rapid loss of reserves
D) the riskiness of 30-year fixed mortgages
E) lending money in return for short-term debt

Question 62

When a bank experiences a bank run, it may have to:

A) print money to cover deposits
B) pay a higher insurance premium
C) offer depositors an IOU
D) call in its loans
E) increase its reserves

Question 63

India did not suffer significantly from the financial crisis in 2007-2009.

Question 64

Net worth is equal to a bank's:

A) investments minus deposits
B) cash plus reserves
C) deposits plus loans
D) loans minus capital
E) total assets minus total liabilities

Question 65

In what year was the Federal Deposit Insurance Corporation established?

A) 2007
B) 1933
C) 1945
D) 1991
E) 1983

Question 66

The following figure shows the daily three-month treasury yield in September 2008. Refer to the following figure when answering
Figure 10.1: Daily Three-Month Treasury Yield: September 2008 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-Consider the data in Figure 10.1. What event precipitated the change in the yield in mid-September?

A) the expanded trade deficit with China
B) the election of Barack Obama
C) the bankruptcy of Lehman Brothers
D) the Greek fiscal crisis
E) the continuing Japanese recession

Question 67

What is the industry Mr. McGuire advises Benjamin to enter after college in the movie The Graduate?

A) microchips
B) genetic engineering
C) leverage
D) plastics
E) import-export

Question 68

A significant cause of the 2008 financial crisis was that financial institutions were:

A) unfunded
B) over-leveraged
C) already insolvent
D) nationalized
E) illiquid

Question 69

In the last months following the collapse of ________, interest rates on commercial paper ________ and access to this form of liquidity ________.

A) Lehman Brothers; rose by over 5 percent; contracted
B) Washington Mutual; fell by over 3 percent; expanded
C) Merrill Lynch; rose by 5 percent; stayed constant
D) General Motors; rose by over 3 percent; contracted
E) AIG; stayed constant; remained unchanged

Question 70

The home price index of housing prices dropped about 10 percent when the housing bubble burst.

Question 71

When a bank's assets cannot cover its liabilities, the bank is:

A) illiquid
B) nationalized
C) immediately shut down
D) bought out by its shareholders
E) insolvent

Question 72

The following figure shows the daily three-month treasury yield in September 2008. Refer to the following figure when answering
Figure 10.1: Daily Three-Month Treasury Yield: September 2008 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-Consider the data in Figure 10.1. What does the data for mid-September in this figure suggest?

A) Increasing investor confidence in the effectiveness of TARP led to smaller purchases of U.S. treasuries.
B) There was a rapid movement of assets from treasuries to stocks.
C) In the aftermath of the collapse of Lehman Brothers investors fled to the safety of short-term treasuries.
D) Prices of gold declined in line with short-term treasury yields.
E) GM and Chrysler declared bankruptcy.

Question 73

In the months following the collapse of Lehman Brothers, banks became increasingly worried about:

A) rising real estate prices
B) lending money via commercial paper
C) the rapid loss of reserves
D) spikes in the federal funds rate
E) exchange rate volatility

Question 74

Refer to the following table when answering
Table 10.2: Hypothetical Bank Sheet ($ millions)
$\begin{array}{lr|lr}{\text { Column A }} &&{\text { Column B }} \\\hline \text { Loans } & \$ 6,800 & \text { Deposits } & \$ 7,500 \\\text { Investments }&3,700 & \text { Short Term Debt } & 300 \\\begin{array}{l}\text { Cash \& } \\\text { Reserves }\end{array} &1,100 & \text { long Term Debt } &1,800 \\\hline\end{array}$

-Given the information in Table 10.2, if the value of this bank's investments decreases by $1,000, what is the approximate leverage ratio of this bank?

A) 9.60
B) 3.87
C) 8.60
D) 2.78
E) Not enough information is given.

Question 75

The federal funds rate is the rate the Fed charges to member banks.

Question 76

The Federal Deposit Insurance Corporation was established, in part, to:

A) prevent bank runs
B) make loans to insolvent banks
C) increase confidence in investment banks
D) eradicate bank risk altogether
E) underwrite consumer loans

Question 77

In 1933, the ________ was set up to ________.

A) Troubled Asset Relief Fund; shore up insolvent commercial banks
B) Federal Reserve System; centralize monetary policy
C) Federal Deposit Insurance Corporation; help prevent bank runs
D) Depository Institutions Deregulation and Monetary Control Act; repeal the Glass-Steagall Act
E) U.S. Department of Treasury; monitor investment bank activity

Question 78

When the investment bank Bear Stearns collapsed, its leverage ratio was:

A) 2 to 1
B) 35 to 1
C) 8 to 1
D) 16 to 1
E) 1 to 12

Question 79

When all depositors converge on a bank to remove their deposits there is a:

A) bank run
B) bank panic
C) liquidity crisis
D) financial meltdown
E) insolvency

Question 80

In 1933, the ________ was established to prevent bank runs; in 2008, the ________ was set up to increase liquidity in financial markets.

A) Troubled Asset Relief Fund; AIG
B) Federal Deposit Insurance Corporation; Troubled Asset Relief Fund
C) U.S. Department of Treasury; Comptroller of the Currency
D) Federal Reserve System; Federal Deposit Insurance Corporation
E) Depository Institutions Deregulation and Monetary Control Act; Glass-Steagall Act