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Page 1
1.
Lehman Brothers was established by Henry Lehman in 1844 as a(n):
A)
investment bank.
B)
commercial bank.
C)
dry goods store.
D)
saloon.
2.
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
3.
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.
4.
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.
5.
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.
6.
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.
Page 2
7.
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.
8.
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.
9.
The first bankers were:
A)
farmers.
B)
merchants who engaged in foreign trade.
C)
insurance companies.
D)
goldsmiths.
10.
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.
11.
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.
12.
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
Page 3
13.
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.
14.
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.
15.
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
16.
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.
17.
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.
18.
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.
Page 4
19.
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.
20.
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
21.
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
22.
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.
23.
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
Page 5
24.
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.
25.
Which of the following is designed to prevent bank runs?
A)
debt overhang
B)
deposit insurance
C)
credit crunch
D)
shadow banks
26.
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.
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.
28.
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.
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.
Page 6
30.
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.
31.
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.
32.
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.
33.
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.
34.
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.
Page 7
35.
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.
36.
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.
37.
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.
38.
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.
39.
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.
40.
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.
Page 8
41.
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.
42.
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.
43.
During the early 1930s, approximately _____ of the banks in the United States failed.
A)
75%
B)
40%
C)
10%
D)
3%
44.
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.
45.
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
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
Page 9
47.
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.
48.
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.
49.
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
50.
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.
51.
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.
52.
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.
Page 10
53.
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.
54.
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.
55.
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.
56.
Following a severe banking crisis, the average increase in the unemployment rate is:
A)
25%.
B)
20%.
C)
10%.
D)
7%.
57.
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
58.
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
Page 11
59.
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.
60.
Debt overhang is the result of:
A)
maturity transformation.
B)
a vicious cycle of deleveraging.
C)
falling unemployment.
D)
rising inflation.
61.
Debt overhang results in _____ levels of debt and assets with _____ values.
A)
reduced; higher
B)
increased; higher
C)
reduced; lower
D)
increased; lower
62.
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
63.
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
64.
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.
Page 12
65.
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.
66.
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.
67.
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.
68.
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.
69.
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.
70.
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.
Page 13
71.
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.
72.
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
73.
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
74.
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.
75.
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.
76.
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.
Page 14
77.
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.
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.
79.
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.
80.
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.
81.
In a credit crunch:
A)
interest rates are so low that savers decrease the quantity of available loanable
funds.
B)
borrowers are forced to pay very high interest rates or may not be able to borrow at
all.
C)
unemployment is usually very low and the growth rate of output is very high.
D)
the spread becomes negative.
Page 15
82.
During the credit crunch in the Great Depression, the spread—the interest rate on Baa
corporate bonds minus the interest rate for government borrowing:
A)
became negative.
B)
was equal to zero.
C)
grew to more than 7%.
D)
fluctuated randomly.
83.
During the banking crisis of the 1930s, the Federal Reserve:
A)
ended the crisis by acting aggressively as a lender of last resort.
B)
rushed to guarantee the liabilities of failing banks.
C)
was established to resolve the banking crisis.
D)
had the legal ability to act as a lender of last resort but failed to do so.
84.
Which of the following is TRUE of the Federal Reserve's response to the banking crises
of the 1930s and 2008?
A)
In both crises, the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks.
B)
In both crises, the Fed failed to use its power to act as a lender of last resort or to
guarantee liabilities of troubled banks.
C)
In the 1930s the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks, but it did not act in 2008.
D)
In 2008 the Fed acted aggressively as a lender of last resort and to guarantee
liabilities of troubled banks, but it did not act in the 1930s.
85.
During the 2008 financial crisis:
A)
both the United States and the European Union underwent severe economic
downturns.
B)
the United States underwent a severe economic downturn, but the European Union
was relatively unaffected by the crisis.
C)
the European Union underwent a severe economic downturn, but the United States
was relatively unaffected by the crisis.
D)
both the United States and the European Union were unaffected by the crisis,
which was severe in Latin America only.
Page 16
86.
Following the 2008 financial crisis:
A)
both the United States and the European Union recovered very quickly, with output
reaching its previous level by early 2009.
B)
recovery in both the United States and the European Union was very slow.
C)
the United States recovered very quickly, but recovery in the European Union was
very slow.
D)
the European Union recovered very quickly, but recovery in the United States was
very slow.
87.
The slow recovery from the 2008 financial crisis meant that the unemployment rate:
A)
remained low in spite of the crisis.
B)
returned quickly to its previous level.
C)
increased and remained high.
D)
fell to its natural rate.
88.
Long-term unemployment is measured by the percentage of the unemployed who have
been out of work for:
A)
a week or longer.
B)
6 weeks or longer.
C)
20 weeks or longer.
D)
27 weeks or longer.
89.
The 2008 financial crisis in Europe was caused primarily by problems with:
A)
home loans.
B)
commercial real estate loans.
C)
credit cards.
D)
public debt.
90.
The threat of a second European financial crisis in 2011 and 2012 was due primarily to
problems with:
A)
home loans.
B)
commercial real estate loans.
C)
credit cards.
D)
public debt.
91.
The threat of a financial crisis in Europe in 2011 and 2012 was based on problems with:
A)
home loans in Germany.
B)
political instability in France.
C)
public debt problems in southern Europe and Ireland.
D)
striking labor unions in northern Europe.
Page 17
92.
The European debt crisis in 2011 began with:
A)
public debt problems in Great Britain.
B)
public debt problems in Greece.
C)
the collapse of the real estate market in Norway.
D)
strikes by labor unions in Spain.
93.
Financial problems began in Greece in late 2009, when:
A)
the Greek government revealed that it had understated its budget deficits and debt.
B)
the European Union forced Greece to give up its membership.
C)
Greece adopted the euro.
D)
the United Nations imposed trade sanctions on Greece.
94.
When private lenders learned the size of Greece's budget deficits and debt in 2009, they:
A)
promptly made loans to the Greek government to prevent a financial crisis.
B)
refused to make further loans to Greece.
C)
seized assets that belonged to the Greek government.
D)
nationalized banks and the manufacturing industry in Greece.
95.
When private lenders refused to lend to the Greek government in 2009, other European
countries:
A)
also refused to lend money to Greece.
B)
forced Greece to abandon the euro and return to the drachma.
C)
provided emergency loans to Greece but demanded harsh budget cuts in return.
D)
forced Greece to leave the European Union.
96.
The effect of the harsh budget cuts required by the European countries who made
emergency loans to Greece in 2011 was:
A)
the speedy return of the Greek economy to full employment.
B)
an inflationary gap in the Greek economy.
C)
that the Greek economy fell into a liquidity trap.
D)
that the Greek economy became even more depressed and was unable to repay its
debts in full.
97.
Greece's economy accounts for _____ of European GDP.
A)
less than 3%
B)
approximately 10%
C)
approximately 20%
D)
almost 30%
Page 18
98.
During the 2008 and 2011 financial crises in Spain and Italy, the spread between the
interest rates on 10-year bonds issued by the governments of Italy and Spain and the
interest rates on 10-year bonds issued by _____ was a measure of risk.
A)
Great Britain
B)
Germany
C)
Ireland
D)
France
99.
An increase in the spread between interest rates on10-year bonds of Italy and Spain and
interest rates on 10-year bonds of Germany indicates:
A)
an increasing probability of a liquidity trap in Italy and Spain.
B)
an increasing probability of a liquidity trap in Germany.
C)
a perception of increasing risk in Italy and Spain.
D)
a perception of decreasing risk in Italy and Spain.
100.
Before the 2008 financial crisis, Spain had _____ debt and a budget _____.
A)
low; surplus
B)
low; deficit
C)
high; surplus
D)
high; deficit
101.
The primary cause of the Spanish recession following the 2008 financial crisis was a:
A)
stock market crash.
B)
housing bubble.
C)
public debt crisis.
D)
devaluation of Spain's currency, the peseta.
102.
During the 2008 financial crisis, investors feared that Spain's government might default
on its debt because:
A)
it spent large amounts of money helping homeowners avoid foreclosure.
B)
it lent too much money to Greece.
C)
the government might have to spend large amounts of money to bail out Spanish
banks.
D)
it was leaving the European Union.
Page 19
103.
After the 2008 financial crisis, interest rates on Italian debt increased because:
A)
they were approaching the zero bound, so the central bank raised them.
B)
the Italian government revalued the lira.
C)
Italy imposed trade sanctions on Iran.
D)
the Italian economy was growing too slowly to generate enough tax revenue to
repay its public debt.
104.
Fiscal stimulus is:
A)
expansionary fiscal policy, such as increases in government spending and tax cuts
designed to reduce unemployment and increase output.
B)
expansionary fiscal policy, such as increases in government spending and tax cuts
designed to increase unemployment and decrease output.
C)
contractionary fiscal policy, such as decreases in government spending and tax
increases designed to reduce budget deficits.
D)
contractionary fiscal policy, such as decreases in government spending and tax
increases designed to increase budget deficits.
105.
Expansionary fiscal measures, such as more government spending and tax cuts designed
to reduce unemployment, are called:
A)
fiscal austerity.
B)
fiscal stimulus.
C)
automatic stabilizers.
D)
maturity transformation.
106.
Fiscal austerity is _____ fiscal policy, such as _____ in government spending and tax
_____ designed to _____ unemployment and _____.
A)
expansionary; increases; cuts; reduce; increase output
B)
expansionary; increases; cuts; increase; decrease output
C)
contractionary; decreases; increases; ignore; reduce budget deficits
D)
contractionary; decreases; increases; ignore; increase budget deficits
107.
Contractionary fiscal measures, such as less government spending and tax increases
designed to reduce budget deficits, are called:
A)
fiscal austerity.
B)
fiscal stimulus.
C)
automatic stabilizers.
D)
maturity transformation.
Page 20
108.
Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis
because most major economies had _____ unemployment and _____ inflation.
A)
low; low
B)
low; high
C)
high; low
D)
high; high
109.
Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis
because:
A)
austerity would only increase inflation and unemployment.
B)
political instability in the Middle East was causing a depreciation of the euro and
the dollar.
C)
the lag associated with automatic stabilizers was too long.
D)
the effectiveness of monetary policy was limited by the zero bound on interest
rates.
110.
After the 2008 financial crisis, proponents of fiscal austerity argued that the primary
problem for the United States and Europe was:
A)
high levels of government deficits and debt that eroded investor confidence.
B)
powerful labor unions that kept wages too high.
C)
unemployment.
D)
inflation.
111.
After the 2008 financial crisis, proponents of austerity argued that it was the appropriate
policy because:
A)
cuts in government spending would increase the interest rates that savers could
earn and would therefore increase the supply of loanable funds.
B)
cuts in government spending would keep interest rates on government debt low and
improve investor confidence.
C)
fiscal stimulus would likely cause deflation.
D)
the lag associated with fiscal stimulus was too long.
112.
After the 2008 financial crisis, proponents of austerity argued that fiscal stimulus was
inappropriate because:
A)
cuts in government spending had increased interest rates.
B)
the increase in government spending had raised interest rates.
C)
unemployment remained high after the stimulus was implemented in 2009.
D)
monetary policy is more effective when the economy is close to the zero bound on
interest rates.
Page 21
113.
Which of the following was NOT one of the problems facing almost all major
economies after the 2008 financial crisis?
A)
high unemployment
B)
low growth of output
C)
high interest rates on public debt
D)
inflation
114.
One of the lessons learned from the 2008 financial crisis was that:
A)
banks had been overregulated.
B)
the Federal Deposit Insurance Corporation was ineffective.
C)
banking regulation was too narrow; before the crisis, shadow banks were not
subject to the same regulation as depository institutions.
D)
financial crises are usually very short, and recovery from them is relatively quick
and easy.
115.
The bill that Congress passed in 2010 to correct many of the problems that led to the
2008 financial crisis was called:
A)
the Wall Street Reform and Consumer Protection Act.
B)
the Sherman Anti-Trust Act.
C)
the Glass-Steagall Act.
D)
the Financial Institutions Modernization Act.
116.
A repo is:
A)
a long-term loan.
B)
a very short-term loan.
C)
another name for a corporate bond.
D)
government debt that it cannot repay.
117.
The Dodd-Frank bill addressed all of the following issues EXCEPT:
A)
consumer protection.
B)
regulation of shadow banks.
C)
election of members of the Federal Reserve Board of Governors.
D)
regulation of derivatives.
118.
The purpose of the Consumer Financial Protection Bureau is to:
A)
guarantee the safety of food and drugs purchased by consumers.
B)
educate consumers on how to save for retirement above and beyond their Social
Security.
C)
police financial industry practices and protect borrowers.
D)
help consumers understand how to get the best health insurance.
Page 22
119.
The Dodd-Frank bill affected derivatives by:
A)
prohibiting them.
B)
requiring that the issuer guarantee 50% of the purchaser's investment.
C)
allowing them to be purchased and sold only by the Federal Reserve.
D)
requiring that they be traded in transparent markets.
120.
According to the Dodd-Frank bill, shadow banks:
A)
are prohibited.
B)
must be merged with commercial banks.
C)
are allowed to operate only in other countries.
D)
are subject to regulation of capital and investments similar to that of banks.
121.
If the government guarantees liabilities of financial institutions other than deposits:
A)
those financial institutions will have the incentive to engage in overly risky
behavior.
B)
those financial institutions will have the incentive to engage in less risky behavior.
C)
the Federal Reserve will be forced to raise reserve requirements.
D)
the economy will be pushed close to the zero bound on interest rates.
122.
Resolution authority means that:
A)
the government has the power to seize control of financial institutions that need a
bailout.
B)
a member of Congress has the power to propose resolutions on the floor of
Congress.
C)
banks have the ability to transform short-term liabilities into long-term liabilities.
D)
Congress has given the Federal Reserve permission to act as a lender of last resort.
123.
Banking crises are usually followed by periods of economic expansion.
A)
True
B)
False
124.
In general, the higher the rate of return on an asset, the lower its liquidity.
A)
True
B)
False
125.
One problem with holding money as an asset is that it doesn't earn any income.
A)
True
B)
False
Page 23
126.
The advantage of holding money as an asset is that it is perfectly liquid.
A)
True
B)
False
127.
Receipts for gold and silver deposited with goldsmiths became one of the first forms of
paper money.
A)
True
B)
False
128.
Medieval goldsmiths were strongly opposed to lending out their customers' gold and
silver.
A)
True
B)
False
129.
Maturity transformation is conversion of long-term liabilities to short-term assets.
A)
True
B)
False
130.
Maturity transformation must always begin with the financial institution accepting
deposits.
A)
True
B)
False
131.
Shadow banks are prohibited from engaging in maturity transformation.
A)
True
B)
False
132.
A bank run can result in bank failure because banks keep only a small fraction of their
depositors' funds in the bank vault and are therefore unable to meet their customers'
demands for their money.
A)
True
B)
False
133.
Even if a bank is in excellent financial condition, a bank run can still drive it to failure.
A)
True
B)
False
Page 24
134.
Shadow banks are not subject to runs.
A)
True
B)
False
135.
The savings and loans crisis of the 1980s was caused by an asset bubble in commercial
real estate.
A)
True
B)
False
136.
Between the Civil War and the Great Depression, the United States' banking system was
more stable than it has been since the Great Depression.
A)
True
B)
False
137.
The national banking era is the period following the establishment of the Federal
Reserve in 1913.
A)
True
B)
False
138.
The main purpose of the Federal Reserve, which was established in 1913, was to put an
end to the bank crises that occurred during the national banking era.
A)
True
B)
False
139.
To put an end to the bank failures during the 1930s President Franklin Roosevelt
declared a bank holiday and temporarily closed all banks.
A)
True
B)
False
140.
Following the banking crises of the 1930s, both real GDP and the price level increased
immediately.
A)
True
B)
False
141.
The banking crises in Finland, Sweden, and Japan in the early 1990s were caused by
numerous bank runs in each country.
A)
True
B)
False
Page 25
142.
For much of the 1990s and 2000s, Ireland, known as the Celtic Tiger, grew faster than
the rest of Europe.
A)
True
B)
False
143.
Ireland's rapid growth for much of the 1990s and 2000s came to an end as the result of
overbuilding in the railroad industry.
A)
True
B)
False
144.
Following the banking crisis that began in 2007, the unemployment rate in Ireland,
which had been less than 5%, increased above 10%.
A)
True
B)
False
145.
Following the panic of 1893 in the United States and the Swedish banking crisis in
1991, the two countries had rapid growth of real GDP and low unemployment rates.
A)
True
B)
False
146.
Severe banking crises are usually followed by deep recessions and slow recoveries.
A)
True
B)
False
147.
On average the unemployment rate increases by 7% following a severe banking crisis.
A)
True
B)
False
148.
Following a severe banking crisis, unemployment usually begins to decrease in a few
months.
A)
True
B)
False
149.
In a credit crunch, interest rates are unusually low.
A)
True
B)
False
Page 26
150.
In debt overhang consumers' debt level is diminished and the value of their assets has
increased.
A)
True
B)
False
151.
During banking crises monetary policy is very effective, but fiscal policy is ineffective.
A)
True
B)
False
152.
In a recession, the Fed usually sells short-term government securities to increase interest
rates and decrease spending.
A)
True
B)
False
153.
In a recession, the Fed usually purchases short-term government securities to decrease
interest rates and increase spending.
A)
True
B)
False
154.
In a banking crisis, banks are likely to hold more excess reserves than usual.
A)
True
B)
False
155.
Monetary policy may be ineffective in a banking crisis because interest rates are so low
that consumers and businesses borrow and spend too much.
A)
True
B)
False
156.
When the economy is in a liquidity trap, consumers and businesses aren't willing to
borrow and spend even though interest rates may be zero.
A)
True
B)
False
157.
When the Fed acts as a lender of last resort, it lends money to homeowners who are in
danger of losing their home through foreclosure.
A)
True
B)
False
Page 27
158.
Following the financial crisis of 2008, commercial banks relied heavily on the Fed as a
lender of last resort, borrowing approximately $700 billion.
A)
True
B)
False
159.
In a severe financial crisis, if the public fears that a bank's assets aren't worth enough to
cover its debts, a lender of last resort is not likely to be able to prevent bankruptcy of the
bank.
A)
True
B)
False
160.
During the financial crisis of 2008, the Federal Reserve bought not only Treasury bills
but also commercial paper issued by private companies and the debt of Fannie Mae and
Freddie Mac.
A)
True
B)
False
161.
Following the 2008 financial crisis, by 2011, almost half of unemployed workers were
long-term unemployed.
A)
True
B)
False
162.
As a consequence of the 2008 financial crisis, the economies of the United States and
the European Union shrank by more than 25%.
A)
True
B)
False
163.
Greece's financial difficulties following the crisis of 2008 were due primarily to a
housing bubble.
A)
True
B)
False
164.
Spain's financial difficulties following the crisis of 2008 were due primarily to a housing
bubble.
A)
True
B)
False
Page 28
165.
Fiscal stimulus is expansionary fiscal measures, such as increases in government
spending and decreases in taxes, designed to reduce unemployment.
A)
True
B)
False
166.
Fiscal austerity is expansionary fiscal measures, such as increases in government
spending and decreases in taxes, designed to reduce unemployment.
A)
True
B)
False
167.
Almost all major economies faced high unemployment and low growth following the
2008 financial crisis.
A)
True
B)
False
168.
The 2008 financial crisis made it clear that banks were overregulated.
A)
True
B)
False
169.
In 2010, Congress passed the Dodd-Frank Act, which was designed to improve
regulation of the financial sector and avoid another financial crisis like the one of 2008.
A)
True
B)
False
170.
A repo is a long-term loan.
A)
True
B)
False
171.
One of the elements addressed in the Dodd-Frank bill was authority over nonbank
financial institutions that face bankruptcy.
A)
True
B)
False
172.
The Dodd-Frank bill established the Consumer Financial Protection Bureau to help
consumers understand the financial impact of Social Security.
A)
True
B)
False
Page 29
173.
Explain the trade-off between rate of return and liquidity. How do banks affect the
trade-off?
174.
What is maturity transformation? Explain the difference between maturity
transformation by depository banks and by shadow banks.
175.
Explain how shadow banks, which don't take deposits, can have bank runs.
176.
Explain the two main causes of banking crises.
177.
What caused the banking crises in the 1990s in Finland, Sweden, and Japan?
178.
Describe the financial contagion that occurred during the Irish banking crisis in 2008.
179.
Why are banking-crisis recessions so bad?
180.
Explain the difference between fiscal stimulus and fiscal austerity in dealing with the
recessions that occurred in many countries after the 2008 financial crisis.
181.
Briefly explain the four main elements of the Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act).
182.
Subprime mortgages:
A)
carry an interest rate below the prime rate.
B)
are in default.
C)
are made to buyers who do not qualify for a standard mortgage.
D)
can be made only by the government.
183.
Loans to home buyers who do not qualify for a standard mortgage are called _____
mortgages.
A)
subsidized
B)
subprime
C)
government-guaranteed
D)
shadow
Page 30
184.
A situation in which borrowers cannot find credit or must pay very high interest rates
for loans is called a:
A)
liquidity trap.
B)
zero-bound limit.
C)
credit crunch.
D)
stagflation.
185.
Commercial banks _____, while investment banks _____.
A)
accept deposits from customers; trade financial assets but don't accept deposits
B)
are not allowed to make profits; are allowed to profit from buying and selling
financial assets
C)
cannot own financial assets; can own a wide variety of financial assets
D)
are a type of shadow bank; are not shadow banks
186.
Which of the following is a shadow bank?
A)
credit union
B)
commercial bank
C)
savings and loan
D)
hedge fund
187.
Banks:
A)
reduce the opportunity cost of the trade-off between rate of return and liquidity.
B)
increase the opportunity cost of the trade-off between rate of return and liquidity.
C)
encourage people to hold more cash.
D)
reduce the amount of liquidity in the economy.
188.
Depository banks:
A)
buy short-term securities from investors, change their maturity, and sell them as
long-term securities to other investors.
B)
buy long-term securities from investors, change their maturity, and sell them as
short-term securities to other investors.
C)
accept short-term deposits from depositors and use them to make long-term loans.
D)
accept long-term deposits from depositors and use them to make short-term loans.
189.
Maturity transformation can be done by:
A)
depository banks but not by shadow banks.
B)
shadow banks but not by depository banks.
C)
both depository banks and shadow banks.
D)
neither depository banks nor shadow banks.
Page 31
190.
Before the 2008 financial crisis, shadow banks were:
A)
much smaller than depository banks.
B)
strictly regulated and therefore offered their customers lower rates of return than
depository banks.
C)
required to hold more reserves than depository banks.
D)
not subject to regulations, such as capital requirements and reserve requirements.
191.
A shadow bank may be subject to a bank run if:
A)
its depositors withdraw their funds because they fear that it is financially unsound.
B)
depositors decide that the FDIC insurance of $250,000 per account is insufficient
to cover their potential losses.
C)
they purchase too many government securities.
D)
the shadow bank's lenders decide it is unsafe and stop lending it money.
192.
Which of the following is an explanation of banking crises?
A)
Many banks make the same mistake: investing in an asset bubble.
B)
Banks engage in maturity transformation.
C)
The Federal Reserve, acting as a lender of last resort, introduces too much
competition into the system.
D)
Banks are paying low interest rates on deposits and charging high interest rates on
loans.
193.
In a vicious cycle of deleveraging:
A)
banks buy some type of asset and push the price up to an unreasonable level.
B)
banks are forced to sell assets at a deep discount to reduce their debt.
C)
depository banks and shadow banks engage in maturity transformation.
D)
the Fed is prohibited from acting as a lender of last resort.
194.
A sudden and widespread disruption of financial institutions and markets is known as:
A)
a liquidity trap.
B)
the fallacy of composition.
C)
a financial panic.
D)
stagflation.
Page 32
195.
The national banking era was the period:
A)
between when the Federal Reserve was formed in 1913 and the Great Depression
in 1929.
B)
in which the fewest banking crises occurred in the United States.
C)
when shadow banking became an important part of the financial sector of the
economy.
D)
after the Civil War and before the Federal Reserve was established in 1913.
196.
During the banking crisis in the early 1930s approximately _____ of the banks in the
United States failed.
A)
2%
B)
10%
C)
40%
D)
90%
197.
The primary cause of the banking crises that occurred between 1970 and 2007 in poor
countries was_____. The primary cause in wealthy countries was _____.
A)
too much government regulation; too much government regulation
B)
too-high capital requirements; the purchase of too much government debt
C)
too-low capital requirements; too-high capital requirements
D)
corruption; real estate bubbles
198.
During most of the 1990s and 2000s, Ireland was called:
A)
the Celtic Tiger.
B)
a tax haven for wealthy people who were avoiding the U.S. income tax.
C)
the Sapphire Isle.
D)
the Axis of Evil.
199.
Banking crises are:
A)
not very harmful to the real economy, since money is neutral in the long run.
B)
typically followed by recessions.
C)
typically the beginning of long periods of economic growth.
D)
usually over with very quickly.
200.
In a severe banking crisis:
A)
very few banks in the system actually go into bankruptcy.
B)
government intervention usually is not required, since the market outcome is
always preferable to one that results from government intervention.
C)
the economy usually falls into a severe recession followed by a slow recovery.
D)
economic growth usually resumes quickly after the crisis is resolved.
Page 33
201.
Long recessions often follow banking crises because:
A)
banking crises may cause a surplus of credit, so that interest rates fall to levels so
low that investors earn very little in interest income.
B)
the vicious cycle of deleveraging that follows leads to overpriced assets.
C)
consumer and investment spending increase too rapidly, causing high rates of
inflation.
D)
monetary policy is not very effective because banks hold on to excess reserves and
are unwilling to lend them out.
202.
After a banking crisis, when the Federal Reserve buys government securities to increase
the money supply and decrease interest rates:
A)
consumers and businesses may not respond by increasing their spending because of
debt overhang.
B)
consumers and businesses usually borrow too much and spend too much, causing
inflation.
C)
banks may fear runs, so they hold on to excess reserves rather than lending them to
consumers and businesses.
D)
consumers and businesses may not respond because the recession has increased the
value of their assets so much that they don't need to borrow money to buy more.
203.
Since the 1930s, following banking crises, if financial institutions are not able to borrow
in private credit markets:
A)
the Federal Reserve takes a laissez-faire attitude, allowing market forces to
determine which institutions will survive.
B)
the Federal Reserve may act as a lender of last resort.
C)
the U.S. Treasury may make short-term loans to them.
D)
they are not allowed to engage in maturity transformation until their financial
condition improves.
204.
Policy for dealing with banking crises changed from laissez-faire to taking steps to
contain the damage from bank failures:
A)
after Ronald Reagan became president in 1980.
B)
after World War II in 1945.
C)
during the Great Depression in the 1930s.
D)
after the Civil War in the 1860s.
Page 34
205.
If the government guarantees not only the deposits but also the other liabilities of a
failing bank, the government usually:
A)
temporarily takes over the bank but then reprivatizes it as soon as possible.
B)
merges it with the Treasury.
C)
merges it with the Federal Reserve.
D)
closes the bank permanently.
206.
From the 1930s until the 2008 financial crisis, banking regulation addressed all of the
following except:
A)
deposit insurance.
B)
capital requirements.
C)
reserve requirements.
D)
shadow banks.
207.
Financial regulation was not adequate to deal with the 2008 financial crisis because:
A)
before 2008 banks were very small and could be effectively regulated by the states.
B)
up until the 2008 crisis, the market had worked very well in preventing banking
crises, so there was very little need for bank regulation.
C)
the role of shadow banks had become very important, but shadow banks were not
subject to banking regulation at the time of the 2008 crisis.
D)
the Supreme Court had ruled that the regulatory powers of the Federal Reserve
were unconstitutional and prohibited the Fed from using its regulatory powers.
208.
A repo is a:
A)
share of stock in a depository bank.
B)
share of stock in a shadow bank.
C)
long-term loan.
D)
short-term loan.
209.
After the 2008 financial crisis, policy makers realized that the scope of banking
regulation was:
A)
too narrow, because the Federal Reserve was the only agency with any power to
regulate banks.
B)
too broad, because both depository and shadow banks were overregulated.
C)
too broad, because market forces, not government regulation, should be allowed to
determine the outcome of a financial crisis.
D)
too narrow, because shadow banks were not subject to much regulation.
Page 35
210.
Before the financial crisis in 2008 shadow banks:
A)
were outside of the lender-of-last-resort system.
B)
offered checkable deposits to their customers.
C)
were not allowed to operate across state lines.
D)
were required to hold more capital than depository banks.
211.
The special office created by the Dodd-Frank Act to police financial industry practices
and protect borrowers is called the:
A)
Food and Drug Administration.
B)
Consumer Financial Protection Bureau.
C)
Board of Governors.
D)
Consumer Protection Agency.
212.
The Wall Street Reform and Consumer Protection Act of 2010 addressed all of the
following EXCEPT:
A)
consumer protection.
B)
derivatives regulation.
C)
regulation of shadow banks.
D)
interest rate ceilings on checkable deposits.
213.
Under the Dodd-Frank Act of 2010, derivatives:
A)
have to be bought and sold in open, transparent markets so that there is a limit to
the invisible risk that financial traders can assume.
B)
are prohibited.
C)
may be purchased and sold in foreign markets only.
D)
may be purchased and sold only by state and local governments.
214.
If a financial institution is systemically important:
A)
it is an important part of the Federal Reserve banking system.
B)
the business cycle affects it more than it affects the average financial institution.
C)
its activities have the potential to cause a banking crisis.
D)
it is not allowed to engage in maturity transformation.
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Answer Key
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