True / False
1. If the value of a bank’s assets is rising, a high leverage ratio increases the percentage rise in its capital.
a.
True
b.
False
2. The downside to a bank having a high leverage ratio is that a decline in asset value magnifies losses.
a.
True
b.
False
True
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
3. A bank is solvent as long as its liabilities are greater than its assets.
a.
True
b.
False
False
1
Easy
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Comprehension
4. During a time of rising asset values, a bank can increase its returns by engaging in regulatory capital arbitrage.
a.
True
b.
False
True
1
Moderate
United States – BUSPROG: Analytic
Bloom’s: Comprehension
5. Regulatory capital is the amount of capital financial institutions should hold based on the riskiness of their different
True
1
Moderate
United States – BUSPROG: Analytic
Bloom’s: Application
assets.
a.
True
b.
False
6. According to economist John Taylor, the Fed set its federal funds rate target too high during the period 2002-early
2006, which contributed to the financial crisis of 2007-2009.
a.
True
b.
False
False
1
Easy
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Knowledge
7. Rising savings rates in emerging countries in the period 2000-2008 are associated with both falling and rising mortgage
interest rates in the United States.
a.
True
b.
False
True
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Comprehension
8. When housing prices rise, homeowners gain equity in their homes.
a.
True
b.
False
True
1
Easy
United States – BUSPROG: Analytic
Bloom’s: Comprehension
9. In February 2009, Congress passed (and President Obama signed) a $787 billion fiscal stimulus bill in an attempt to
False
1
Easy
United States – BUSPROG: Analytic
Bloom’s: Comprehension
improve the economy.
a.
True
b.
False
10. In the early 2000s, banks lowered lending standards to comply with the Community Reinvestment Act.
a.
True
b.
False
True
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Knowledge
11. In the early 2000s, Fannie Mae and Freddie Mac came under political pressure to buy nontraditional loans.
a.
True
b.
False
True
1
Easy
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Knowledge
12. For financial institutions, securitization is the means by which regulatory capital arbitrage lowers capital requirements.
a.
True
b.
False
True
1
Moderate
United States – BUSPROG: Analytic
Bloom’s: Comprehension
13. If nominal GDP is declining, it is necessarily true that Real GDP is also declining.
a.
True
b.
False
True
1
Easy
United States – BUSPROG: Analytic
Bloom’s: Knowledge
Multiple Choice
14. Insolvency is a condition where a firm’s
a.
liabilities are greater than assets.
b.
assets are greater than liabilities.
c.
assets are equal to liabilities.
d.
liabilities are less than or equal to assets.
ANSWER:
POINTS:
DIFFICULTY:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
economics and definitions of economics
KEYWORDS:
Bloom’s: Application
15. The _______________________ (TARP) is an example of a government program created to help stabilize the
financial sector during the financial crisis of 2007-2009.
a.
Times Are Really Problematic
b.
Tarnished Assets Recovery Program
c.
Troubled Assessments Recovery Program
d.
Troubled Assets Relief Program
ANSWER:
POINTS:
DIFFICULTY:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
KEYWORDS:
Bloom’s: Application
16. A bank has $200 million in assets and $150 million in liabilities. The banks net worth is _____________ million and
its leverage ratio is __________________.
a.
$350; 0.56 to 1
b.
$175; 1.14 to 1
c.
$50; 4 to 1
d.
$25; 8 to 1
ANSWER:
DIFFICULTY:
ANSWER:
POINTS:
DIFFICULTY:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
KEYWORDS:
Bloom’s: Comprehension
NOTES:
17. A bank has $390 million in assets and $330 million in liabilities. The bank’s net worth is _____________ million and
its leverage ratio is __________________.
a.
$360; 1.08 to 1
b.
$60; 0.15 to 1
c.
$40; 3.75 to 1
d.
$60; 6.5 to 1
United States – BUSPROG: Analytic
Bloom’s: Application
18. A bank initially has $190 million in assets and $150 million in liabilities. The banks net worth (capital) is
_____________ million. If the bank’s assets increase by 10% and its liabilities do not change, its capital increases by
____________ .
a.
$340; 10%
b.
$40; 47.5%
c.
$40; 10%
d.
$40; 32.2%
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
19. A bank initially has $250 million in assets and $200 million in liabilities. The banks net worth (capital) is
_____________ million. If the bank’s assets decline by 10% and its liabilities do not change, its capital decreases by
____________ .
a.
$50; 50%
b.
$50; 100%
c.
$50; 10%
d.
$450; 10%
United States – OH – Default City – DISC: The study of economics and – DISC: The study of
United States – BUSPROG: Analytic
Bloom’s: Application
20. A bank initially has $620 million in assets and $580 million in liabilities. The banks net worth (capital) is
_____________ million. If the bank’s assets decline by 5% and its liabilities do not change, its capital decreases by
____________ .
a.
$40; 5%
b.
$70; 141.4%
c.
$40; 77.5%
d.
$600; 5%
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
New
21. __________________ capital specifies the amount of capital financial institutions should hold based on the riskiness
of their assets.
a.
Regulatory
b.
Securitization-based
c.
Risk-based
d.
Leverage-based
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Comprehension
22. According to John Taylor, during the period 2002-early 2006 the Fed set its federal funds rate target _____________
the rate that would have existed had the Fed set its target using the Taylor rule.
a.
below
b.
above
c.
equal to
d.
sometimes below and sometimes above
1
Moderate
United States – BUSPROG: Analytic
economics and definitions of economics
economics and definitions of economics
Bloom’s: Application
23. According to John Taylor (for whom the Taylor rule is named), during the period 2002-early 2006 actual Fed policy
was “too_________” , which he believes led to both interest rates being “too ________” and rising housing prices in the
United States.
a.
contractionary; high
b.
contractionary; low
c.
expansionary; low
d.
expansionary; high
24. Suppose that a bank has $500 million in asset X, $400 million in asset Y, and $200 million in asset Z. Each asset has
a different risk weight. The risk weight for asset X is 40%, the risk weight for asset Y is 70%, and asset Z has zero
risk. The amount of risk-weighted assets for this bank is ____________ million. Assuming that the bank has to hold
capital equal to 8% of its risk-weighted assets, the bank must hold _____________ million in capital.
a.
$480; $38.4
b.
$1,100; $88
c.
$1,100; $880
d.
$340; $27.2
United States – BUSPROG: Analytic
Bloom’s: Application
25. Suppose that a bank has $30 million in asset X, $10 million in asset Y, and $20 million in asset Z. Each asset has a
different risk weight. The risk weight for asset X is 30%, the risk weight for asset Y is 60%, and the risk weight for asset
Z is 10%. The amount of risk-weighted assets for this bank is ____________ million. Assuming that the bank has to hold
capital equal to 8% of its risk-weighted assets, the bank must hold _____________ million in capital.
a.
$17; $13,6
b.
$60; $4.8
c.
$17; $1.36
d.
$66; $5.28
United States – BUSPROG: Analytic
Bloom’s: Application
26. Securitization is the process by which financial institutions
United States – BUSPROG: Analytic
Bloom’s: Application
a.
pool together a group of loans and then issue securities backed by the pool.
b.
determine the composition of their assets that will yield the optimal amount of security for their financial
health.
c.
borrow funds from the Federal Reserve and then use those funds to make loans to their customers.
d.
determine sub-prime mortgage rates.
27. Regulatory capital arbitrage is a means of
a.
using borrowed funds to increase the returns that can be earned with a given amount of capital.
b.
specifying the amount of capital that financial institutions should hold based on the riskiness of their different
assets.
c.
determining mortgage rates for sub-prime borrowers.
d.
changing the composition of assets in such a way as to lower the overall amount of capital a financial
institution holds for a given level of assets.
United States – BUSPROG: Analytic
Bloom’s: Application
28. In the 1990s and early 2000s, mortgage lending standards ______________ in the United States. In general, there was
a move _____________ traditional lending practices during this period.
a.
declined; away from
b.
declined; towards more
c.
became more strict; away from
d.
became more strict; towards more
United States – BUSPROG: Analytic
United States – OH – Default City – DISC: The study of economics and – DISC: The study of
economics and definitions of economics
Bloom’s: Application
29. There are some economists who argue that low mortgage interest rates in the time period preceeding the financial
crisis of 2007-2009 were a result of a ___________ in global savings. They argue that emerging countries began to save
___________ which helped to _____________ the supply of loanable funds in the United States.
a.
glut; less; decrease
b.
glut; more; increase
United States – BUSPROG: Analytic
United States – OH – Default City – DISC: The study of economics and – DISC: The study of
Bloom’s: Application
c.
decline; more; increase
d.
decline; less; decrease
30. The Community Reinvestment Act (CRA) was passed in 1977 to encourage financial institutions
to_________________________. It was revised in 1995 to ____________ the percentage of mortgage loans going to
low- and moderate-income borrowers.
a.
lend to only the most qualified borrowers; increase
b.
meet the needs of borrowers in all segments of their communities; decrease
c.
meet the needs of borrowers in all segments of their communities; increase
d.
lend to only the most qualified borrowers; decrease
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
31. A bank has $150 million in assets and $90 million in liabilities. The bank’s net worth is _____________ million and
the bank is ____________.
a.
$105; insolvent
b.
$40; insolvent
c.
$60; solvent
d.
$60; solvent
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
32. A bank has $200 million in assets and $230 million in liabilities. The bank’s net worth is _____________ million and
the bank is ____________.
a.
-$215; insolvent
b.
-$30; insolvent
c.
$15; solvent
d.
$30; solvent
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
33. Some economists argue that the Fed set its federal funds rate target “too _________” in the early 2000s, which was
one of the contributing factors which led to ____________ mortgage interest rates and a(n) ___________ housing prices.
a.
low; low; increase
b.
low; low; decline
c.
high; high; decline
d.
high; high; increase
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
34. The Federal National Mortgage Association (FNMA), also known as Fannie Mae, was established in ________to
____________ demand in the housing market.
a.
1970; increase
b.
1938; increase
c.
1938; decrease
d.
1970; decrease
United States – BUSPROG: Analytic
Bloom’s: Knowledge
35. The ability of banks to get insurance from ______________ encourages banks to take on a little bit _________ risk
than they would in the absence of deposit insurance.
a.
the FDIC; less
b.
Fannie Mae (FNMA); more
c.
the FDIC; more
d.
Fannie Mae (FNMA); less
United States – OH – Default City – DISC: The study of economics and – DISC: The study of
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Application
36. A ____________________ loan is a nontraditional mortgage loan granted to persons who have some factor, such as
low credit ratings, which suggest that they could default on the repayment of their debt.
a.
mortgage-backed security
b.
collateralized
c.
subprime mortgage
d.
risk-based mortgage
Moderate
United States – BUSPROG: Analytic
Bloom’s: Comprehension
37. One of the contributing factors to the financial crisis of 2007-2009 was that mortgage lending practices were
____________ strict in the late 1990s and early 2000s, compared to earlier periods such as the 1970s and 1980s, which
led to a(n) _______________ in subprime and other nontraditional mortgage loans.
a.
less; increase
b.
more; increase
c.
less; decline
d.
more; decline
Easy
United States – BUSPROG: Analytic
economics and definitions of economics
Bloom’s: Comprehension
38. Former Fed Chairman Alan Greenspan has argued that low ___________ interest rates, not ______________ interest
rates, were the cause of the housing boom in the late 1990s and early 2000s. He also argued that the Fed has more control
over _______________ rates than over ____________ rates.
a.
long-term; short-term
b.
long-term; long-term
c.
short-term; short-term
d.
short-term; long-term
Easy
United States – BUSPROG: Analytic
economics and definitions of economics
economics and definitions of economics
Bloom’s: Application