1. Which of the following institutions is NOT part of the shadow banking system?
a. hedge funds
b. investment banks
c. depository banks
d. money market funds
2. An investment bank is susceptible to events similar to bank runs, and may collapse if:
a. depositors rush to withdraw more deposits than an investment bank has available in reserve.
b. short-term lenders refuse to lend to the investment bank, and the investment bank cannot fund its operations.
c. long-term asset holders refuse to let the investment bank purchase assets, and the investment bank cannot make profits.
d. the investment bank holds too much in reserves and does not invest enough in long-term assets.
3. Suppose the average price of art (an asset) is influenced by household incomes only. Historically, this relationship is given by PA = $5,000 + .05 Af— I, where PA is the price of art and I is household income. Suppose household income during the year is $100,000. Which of the following art prices would indicate that an asset bubble might be forming in the market for art?
4. The main difference between the financial crisis of 2008 in the United States and the subsequent debt crisis in Europe is that:
a. the crisis in the United States carried the possibility of financial contagion, while Europe's crisis is limited to a few isolated nations.
b. European economies rebounded quickly from their crisis, while the U.S. economy has experienced a slower recovery.
c. the financial crisis of 2008 was fairly mild, while the subsequent debt crisis in Europe is more severe.
d. the crisis of 2008 revolved around private debt, while the subsequent crisis in Europe revolves around public debt.
5. Which of the following provisions is NOT part of the financial regulation enacted in the aftermath of the financial crisis?
a. reserve requirement regulation
b. derivatives regulation
c. consumer protection
d. shadow bank regulation
6. What is the primary reason why governments and central banks act as lenders of last resort for the banking system?
a. By doing so, governments can guarantee the liabilities of the banking system and avoid bank runs.
b. This type of lending provides short-term cash for banks that are facing a bank run but are fundamentally solvent.
c. This type of lending provides credit to shadow banks to prevent credit markets from freezing up in times of crisis.
d. By doing so, government and central banks can ensure that banks have enough capital to remain solvent during times of crisis.
7. During periods of financial crisis, monetary policy is typically:
a. less effective, since businesses and consumers are less likely to borrow even as interest rates fall.
b. more effective, since financial crises primarily affect the economy through declining investment, and aggressive monetary policy will boost investment.
c. less effective, since aggressive monetary policy will likely lead to rapid inflation during a financial crisis.
d. more effective, since financial crises primarily affect the economy through declining consumption, and aggressive monetary policy will boost consumption.
8. Worldwide, financial crises are:
a. rare events, but typically have similar causes.
b. common events, and typically have similar causes.
c. common events, and begin for a variety of reasons.
d. rare events, and begin for a variety of reasons.
9. During the financial crisis of 2008, which of the following was NOT an issue for the U.S. economy?
a. a credit crunch affecting borrowing and spending
b. a spike in interest rates as a result of monetary policy
c. debt overhang, as asset prices plummeted
d. soaring unemployment, as firms tried to cut costs
10. Financial crises are more likely to occur in:
a. advanced economies because banks can grow to a large size and affect the entire economy.
b. advanced economies because they are more sensitive to global events.
c. smaller, poor economies because they often lack the regulation to prevent financial panics.
d. smaller, poor economies because the financial sector makes up a larger segment of their economy.
11. Which of the following is an example of maturity transformation?
a. John sells his house and uses the profits from the sale as a down payment on his next house.
b. The local credit union offers savings accounts and uses the deposits to fund car loans.
c. An investment bank borrows from the Federal Reserve discount window and uses those funds to make overnight loans to other banks.
d. A firm uses profits for the quarter to fund the purchase of new computers.
12. During the "bank holiday" in 1933:
a. banks received loans from the Federal Reserve at zero interest to maintain stability.
b. President Roosevelt instituted deposit insurance for the banking system.
c. banks were temporarily closed to prevent further bank failures.
d. a record number of banks failed within a two-week period.
13. The major difference between Fed policy in 2008 and Fed policy during the Great Depression is that:
a. during the Depression, the Fed acted more aggressively as lender of last resort.
b. during the crisis in 2008, the Fed had fewer tools at its disposal than during the Depression.
c. during the crisis in 2008, the Fed did not take steps to prevent a credit freeze.
d. the Fed did not take steps to rescue failing banks for years during the Great Depression.
14. European proponents of austerity argue that:
a. Europe's recent troubles all revolve around high levels of government debt and can be resolved by cutting deficits.
b. low inflation indicates that reducing government deficits is the proper policy.
c. because unemployment remains high in Europe, a larger amount of stimulus is needed.
d. because interest rates are low in Europe, governments should borrow and spend to stimulate the economy.
15. During the crisis in 2008, the Fed enacted unusual measures to improve economic conditions by:
a. lowering the interest rate by conducting open-market purchases.
b. providing direct financing to private companies.
c. providing loans directly to consumers.
d. providing loans to depository banks through the discount window.
16. Which of the following is an example of debt overhang?
a. You borrow $30,000 to go to college and obtain a job paying $50,000 per year once you graduate.
b. You buy a painting with cash for $4,000. Two years later, you are forced, due to financial hardship, to sell at a loss (of $2,000).
c. You borrow $40,000 to purchase a new car. You total the car within three months and receive only $30,000 from the insurance company. You still owe $39,000 on the car loan.
d. You purchase stock in an Internet company, and immediately after your purchase, the value declines by 20%.
17. Proponents of an additional stimulus in the United States in the aftermath of the financial crisis of 2008 might argue that:
a. the current unemployment, despite the stimulus in 2009, is a sign that the size of the original stimulus was not large enough.
b. there is never a long-term cost to a stimulus, since the additional debt will be repaid with higher tax revenues as the economy grows.
c. an additional stimulus is necessary, but must only be undertaken by the Fed.
d. an additional stimulus would help the economy, but should only be undertaken when interest rates drop lower than they were during the crisis and its aftermath.
18. When Lehman Brothers was in danger of failing in 2008, the U.S. Treasury decided which of the following?
a. Lehman Brothers was too big to fail and had to be saved at all costs.
b. The financial system could absorb the loss of Lehman Brothers with little consequence.
c. The Treasury decided not to guarantee the value of the assets that Lehman Brothers held, which led deals for purchasing Lehman to fall though.
d. The Treasury decided to bail out Lehman Brothers, using taxpayer funds. However, this provision did not pass through Congress.
19. The financial crisis of 2008 was initiated through an asset bubble in:
c. government debt.
d. corporate bonds.
20. Suppose that government can borrow at 2.5% interest. Typically, companies can borrow at a rate that is 2% higher than government rates. If you notice that rates for companies are 7.5%, this is an indication of:
a. a credit crunch.
b. debt overhang.
c. maturity transformation.
d. an asset bubble.
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