2) The FDIC was created because
A) banks failed to create money the way the Fed wanted them to.
B) people worried about bank failures after World War I, even though very few banks actually
failed.
C) there were so many bank failures in the 1930s.
D) the Fed kept the required reserve ratio too low.
3) Which of the following has been a problem faced by the FDIC in its provision of federal
deposit insurance?
A) moral hazard arising from the tendency for the highest-risk banks to be those most interested
in obtaining deposit insurance in the first place
B) adverse selection arising from the tendency for banks to take on more risk after they receive
deposit insurance
C) moral hazard arising from the tendency for banks to take on more risk after they receive
deposit insurance
D) a relatively low number of bank failures each year, which has reduced the need for deposit
insurance
4) Which of the following statements about the FDIC is correct?
I. The deposit insurance premiums charged by the FDIC to a member bank fully reflect the
riskiness of that bank’s assets
II. The manner in which the FDIC is set up helps protect depository institutions from the rigors
of true market competition
A) I only
B) II only
C) Both I and II
D) Neither I nor II
5) Bank runs are a possibility because
A) the FDIC is inefficient.
B) bankers are often poor businesspeople.
C) in difficult times people want currency instead of demand deposits.
D) banks do not keep enough reserves to cover all their depository liabilities.
6) The manner in which FDIC deposit insurance is set up in the United States encourages banks
to
A) be too conservative in their lending practices.
B) maintain excess reserves that are too great.
C) make riskier loans than they otherwise would.
D) reject some loans that probably would be profitable.
7) If the FDIC eliminated its insurance program for deposits, then
A) the banking system would probably fail.
B) individual depositors would have more incentive to ascertain the soundness and solvency of
the bank.
C) banks would probably hold fewer reserves.
D) moral hazard would be increased.
8) Asymmetric information before a transaction takes place generates the problem of
A) flawed bank regulation.
B) intermediation.
C) adverse selection.
D) bank runs.
9) Deposit insurance shields depositors from the adverse effects of risky decisions and thereby
A) encourages riskier behavior on the part of managers of depository institutions.
B) encourages depositors to monitor the managers of depository institutions more closely.
C) encourages moral hazard on the part of depositors.
D) generates a more efficient banking system.
10) The fact that individuals whose credit worthiness is less than it appears to be are those who
are most willing to borrow funds at any given interest rate is an example of
A) adverse selection.
B) symmetric information.
C) moral bonuses.
D) diverse origins.
11) Which of the following statements is/are correct?
I. Depository institution managers undertake riskier actions than they otherwise would because
of the existence of deposit insurance.
II. Because of the existence of deposit insurance, depositors in savings and loans and other
banks have little incentive to investigate the financial stability of these institutions.
A) I only
B) II only
C) both I and II
D) neither I nor II
12) Lenders generally want borrowers to agree to invest prudently, yet once a loan is made
borrowers may use the funds in a highly risky fashion. This leads to the problem of
A) critical mass.
B) deposit insurance.
C) investor selection.
D) moral hazard.
13) The Federal Deposit Insurance Corporation
A) insures the deposits held by the Fed.
B) insures the deposits held in banks.
C) insures banks against lawsuits by depositors.
D) insures the open market operations of the Fed.
14) As of 2017, the FDIC insured deposit accounts up to which of the following amounts?
A) $10,000.
B) $25,000.
C) $100,000.
D) $250,000.
15) The FDIC helps prevent
A) risky behavior on the part of bankers.
B) inflation.
C) bank runs.
D) risky behavior on the part of depositors.
16) The FDIC fee system encourages depository institutions to
A) make riskier loans than they would otherwise.
B) reject loans that probably would have been profitable.
C) seek only a modest rate of return.
D) operate their institutions in too conservative a fashion.
17) Asymmetric information before a transaction takes place generates the problem of
A) bank runs.
B) irrational behavior.
C) moral hazard.
D) adverse selection.
18) If depository insurance exists, bank managers may make riskier loans than they would have
otherwise, which is an example of
A) regulatory lag.
B) irrational behavior.
C) moral hazard.
D) adverse selection.
19) Which of the following is NOT a potential problem due to federal depository insurance?
A) Banks have an incentive to make riskier loans than they would otherwise.
B) Depositors have little incentive to monitor the behavior of the managers of the depository
institutions.
C) Depositors demand greater interest rates on their deposits to compensate them for the riskier
behavior of the managers of the depository institutions.
D) Lenders have less incentive to investigate the credit-worthiness of borrowers.
20) Bank examinations by the FDIC help reduce the ________ problem, by preventing bank
managers from allocating funds already obtained from depositors to non-creditworthy loans.
A) moral hazard
B) principled hazard
C) adverse selection
D) contrary selection
21) In addition to insuring accounts, the FDIC today has the additional power of
A) setting reserve requirements.
B) establishing FOMC goals.
C) establishing the discount rate.
D) establishing higher capital requirements for banks.
22) The Federal Deposit Insurance Corporation
A) increases the stability of the banking system by reducing the likelihood of bank runs.
B) discourages banks from engaging in excessive risk taking.
C) only insures deposits in money-center banks.
D) was established after the Panic of 1907.
23) Because deposits are insured by the FDIC, most of us do NOT look at the lending behavior
of our banks. This creates a(n) ________ problem.
A) moral hazard
B) principled hazard
C) adverse selection
D) contrary selection
24) Bank X had a reputation for asking few questions when it provided loans. Five years later,
the majority of the loans were not repaid. This is because the bank had failed to address the
A) adverse selection problem.
B) moral hazard problem.
C) contrary selection problem.
D) free-rider problem.
25) Which of the following represents a preventative measure against bank runs?
A) The President of the United States can order banks to pay depositors.
B) The Federal Reserve can lower reserve requirements to ensure that banks have sufficient
funds.
C) The FDIC provides deposit insurance.
D) None of the above is correct.
26) What would cause a bank run?
A) Depositors feel that the bank does not have sufficient assets to cover their deposits.
B) Depositors feel that they are earning too low of a return on their deposits.
C) Borrowers feel that they are being charged too high of an interest rate on their loans.
D) Bank managers choose to hold more excess reserves.
27) What effect has the presence of federal deposit insurance had on the banking industry?
A) Banks now hold more excess reserves.
B) Banks have made it more difficult for customers to qualify for loans.
C) Banks have made riskier loans.
D) Depositors have become more vigilant in monitoring the decisions made by managers of their
banks.
28) The government agency that insures deposits held in banks in the United States is
A) the Federal Reserve System.
B) the Federal Bank Insurance Corporation.
C) the Federal Asset Insurance Corporation.
D) the Federal Deposit Insurance Corporation.
29) Due to the existence of the FDIC, banks
A) may make riskier loans knowing that their depositors are insured.
B) have not changed their behavior even with the existence of insurance.
C) become more cautious in making loans.
D) are no longer concerned about net worth.
30) In which year was the Federal Deposit Insurance Corporation (FDIC) established?
A) 1913
B) 1929
C) 1933
D) 1951
31) The primary purpose of the FDIC is to reduce the potential for
A) government regulations.
B) reserve cheating.
C) bank runs.
D) excessive interest rates.
32) Beginning in late 2000s, the FDIC sought to increase the public’s confidence in depository
institutions by
A) lowering insurance premiums for bank deposits.
B) eliminating insurance premiums for bank deposits.
C) assessing insurance premiums on banks’ total liabilities.
D) changing the scope of insurance to banks’ assets.
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33) Explain the forces that caused the savings and loan debacle in the latter half of the 1980s.