978-1259723223 Test Bank TBChap034 Part 6

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institutions.

238. The Bureau of Consumer Financial Protection was created in 2010 to become part of the

239. If a firm possesses assets whose value exceeds the value of its debts, the firm is said to be

240. Theoretically, during a financial crisis, the Fed is supposed to act as a lender of last resort

to

241. In practice, during a financial crisis, the Fed and other central banks are under pressure to

adopt an “extend and pretend” policy, in order to contain the wave bankruptcies. “Extend and

pretend” refers to extending loans

242. During a financial crisis, the Fed and other central banks often adopt an “extend and

pretend” policy in their emergency lending activities. Which of the following is not a

consequence of this policy?

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investments to avoid well-deserved bankruptcies.

D. It increases the chances of the Fed itself (or another central bank) being dragged into its own

bankruptcy crisis.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 34-07 Discuss the actions of the U.S. Treasury and the Federal

Reserve that helped keep the banking and financial crisis of 2007-2008 from worsening.

Test Bank: II

Topic: The Policy Response to the Financial Crisis

True / False Questions

243. When you use money to purchase groceries, money is functioning as a store of value.

244. Money performs its function as a store of value very well, because it protects one against

the erosion of purchasing power from inflation.

245. As long as the owner (seller) of an asset is willing to accept any price, the asset will sell

quickly, thus making it meet the full definition of liquidity.

246. With token money, the face value is greater than the intrinsic value.

247. The M1 money supply is composed of currency, checkable deposits, and savings deposits.

248. Credit card balances are part of money supply M2.

249. In the United States, all money is essentially the debt of the Fed, commercial banks, and

thrift institutions.

250. The currency held in the vaults of commercial banks is included in the money supply M1.

251. Debit card balances are part of money supply M1, but credit card balances are not.

252. Using a debit card is like writing a check; the amount will be deducted from one’s checking

account.

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A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Remember

Difficulty: 01 Easy

Learning Objective: 34-02 List and describe the components of the U.S. money supply.

Test Bank: II

Topic: The Components of the Money Supply

253. The value (or purchasing power) of money increases when the price level increases.

254. The value of money in the United States is based on the stock of gold and silver held by the

United States government.

255. The Federal Reserve System is independent of Congress and the president and does not

have to follow orders from either Congress or the president.

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to banks and thrifts.

Test Bank: II

Topic: The Federal Reserve and the Banking System

256. The Federal Open Market Committee (FOMC) regulates markets and enforces antitrust

laws to keep markets open and competitive.

257. Unlike banks, thrifts are not subject to monetary control by the Fed, and thus they (thrifts)

do not have to hold reserves against their checkable deposits.

258. The Federal Reserve System is the institution that issues the U.S. paper currency or dollar

bills.

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Topic: Fed Functions, Responsibilities, and Independence

259. The Federal Reserve System is a bankers’ bank and thereby acts as a “lender of last resort”

to banks.

260. The general public can open deposit accounts at their district’s Federal Reserve Bank.

261. The Financial Crisis of 2007–2008 was triggered by problems in the dot-com sector of the

economy.

262. A few years prior to the Financial Crisis of 2007–2008, many people were getting

approved for mortgage loans even without proper documentation or credit checks.

263. Subprime mortgages, which played a central role in the Financial Crisis of 2007–2008, had

been strongly encouraged and supported by the government before the crisis.

264. The Great Recession was the main cause of the Financial Crisis of 2007–2008.

265. During the Great Recession, the bailout money given to the car companies GM and

Chrysler under the TARP program came from the Fed acting in its role as lender of last resort.

266. The Fed traditionally can grant loans to commercial banks but not to investments banks

and securities firms.

267. The Financial Crisis of 2007–2008 halted the consolidation in the U.S. financial industry

that had caused a declining number but increasing size of firms in the industry prior to the crisis.

268. The so-called moral-hazard problem in financial management refers to the fact that

managers will tend to take on more risk if they know that they are somehow insured against

some or all of their losses.

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AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Remember

Difficulty: 01 Easy

Learning Objective: 34-08 Identify the main subsets of the financial services industry in

the United States and provide examples of some firms in each category.

Test Bank: II

Topic: The Postcrisis U.S. Financial Services Industry

269. The TARP loans and the Fed’s lender-of-last-resort actions that bailed out large, failing

financial institutions helped reduce the moral-hazard problem in financial management.

270. Insurance companies are a major category of financial institutions.

271. Mutual fund companies’ activities make their customers become indirect owners of stocks

and bonds in the mutual fund companies’ investment portfolios.

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Difficulty: 02 Medium

Learning Objective: 34-08 Identify the main subsets of the financial services industry in

the United States and provide examples of some firms in each category.

Test Bank: II

Topic: The Postcrisis U.S. Financial Services Industry

272. During a financial crisis, the Fed and other central banks always adopt a strict policy of

lending only to financial firms that are solvent but illiquid.