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39. Which of the following is an example of a participant in the financial sector?
a.
commercial banks
b.
investment banks
c.
hedge funds
d.
brokerage firms
e.
all of the above
40. During the early 2000s the Fed’s __________ federal funds rate targets led to a ___________ in mortgage interest
rates.
a.
low; rise
b.
high; rise
c.
low; rise
d.
low; decline
41. In the early 2000s, the Fed’s ____________ interest rate policy had several effects. Among these effects were a
_______________ in mortgage interest rates and a(n) ____________ in the size of loans taken out by mortgage
borrowers.
a.
high; decline; decrease
b.
low; decline; increase
c.
low; rise; increase
d.
high; rise; increase
42. The Taylor rule is a recommendation of how
a.
banks should determine worthy loan recipients.
b.
the Fed should set the required reserve ratio.
c.
the Fed should set the federal funds rate target.
d.
banks should securitize their debt.
43. According to Alan Greenspan, the Taylor rule is ________________ when trying to figure out the causes of sharp
increases in housing prices. His opinion is based, in part, on his assertion that the Taylor rule addresses ____________
inflation, not ____________ inflation.
a.
inappropriate; product-price; asset-price
b.
inappropriate; asset-price; product-price
c.
appropriate; product-price; asset-price
d.
appropriate; asset-price; product-price
44. A subprime mortgage loan is a loan granted to persons who
a.
have unusually good credit ratings and who represent a very low risk of default on the debt repayment.
b.
are borrowing funds to purchase a business, rather than a home.
c.
might have low credit ratings or some other factors that lead lenders to believe that they could default on the
debt repayment.
d.
work for the government, rather than those who work in the private sector.
45. With collateralized debt obligations (CDOs) buyers are purchasing _________ slices, and buyers of mortgage-backed
securities (MBSs) purchase ___________ slices.
a.
unequal; equal
b.
equal; equal
c.
unequal; unequal
d.
equal; unequal
46. When borrowers are unable to make their monthly mortgage payments, the value of mortgage-backed securities and
collateralized debt obligations
a.
falls, which pushes banks that own them closer to insolvency.
b.
rises, which pushes banks that own them closer to insolvency.
c.
falls; which pushes banks that own them towards greater solvency.
d.
rises, which pushes banks that own them towards greater solvency.
47. A bank with a leverage ratio of 9 to 1 has
a.
$9 in assets for every $1 in liabilities.
b.
$9 in assets for every $1 in capital.
c.
$1 in assets for every $9 in capital.
d.
$1 in assets for every $9 in liabilities.
48. A bank with a leverage ratio of 6.5 to 1 has
a.
$6.50 in assets for every $1 in liabilities.
b.
$6.50 in assets for every $1 in capital.
c.
$1 in assets for every $6.50 in capital.
d.
$1 in assets for every $6.50 in liabilities.
49. For a bank, more capital means more _____________, and it also means ___________ returns when asset values are
rising.
a.
risk; lower
b.
risk; higher
c.
safety; lower
d.
safety; higher
50. International standards for risk-based capital requirements were introduced under the
a.
Federal Reserve Act of 1913.
b.
1988 Basel Accord
c.
Community Reinvestment Act of 1977.
d.
Federal Deposit Insurance Act of 2008.
51. Which of the following bank assets declined in value in the mid-2000s?
a.
subprime loans
b.
mortgage-backed securities
c.
collateralized debt obligations
d.
nontraditional loans
e.
all of the above
52. When we say that the financial crisis can be viewed as a balance sheet problem, this is descriptive of
a.
banks’ assets being greater than their liabilities.
b.
banks possessing assets that are declining in value, resulting in banks approaching insolvency.
c.
banks having low leverage ratios.
d.
banks engaging in regulatory capital arbitrage.
e.
none of the above
53. Which sequence of events correctly and sequentially best describes financial sector problems spilling over to the real
sector of the economy?
a.
Bank assets increase, capital increases, consumers purchase less, firms lay-off workers.
b.
Bank liabilities increase, capital decreases, consumers purchase more of the “wrong” products, firms lay-off
some workers and hire other workers.
c.
Bank assets decline in value, banks approach insolvency, banks cut back on lending, consumers purchase less,
some firms produce less and other firms go out of business.
d.
Banks engage in regulatory capital arbitrage, leverage ratios are rising, asset values are rising, consumers
purchase less, producers produce less, firms lay-off some workers.
e.
none of the above
54. As a bank approaches insolvency, it is likely to
a.
decrease its lending activities.
b.
increase its lending activities.
c.
find that its capital is declining.
d.
try to increase its liabilities
e.
a and c
55. What does the term run on the bank mean?
a.
People will rush in to deposit money in the bank.
b.
People will rush to buy the bank’s stock.
c.
Depositers of the bank will rush in to close out their accounts at the bank.
d.
Depositers of the bank will rush in to add money to the accounts they already have with the bank.
e.
none of the above
56. The answer is, “They are mortgage loans granted to persons who might have low credit ratings.” The question is:
a.
What are traditional loans?
b.
What are collateralized debt obligations?
c.
What are subprime mortgage loans?
d.
What are securitized loans?
57. Bank B takes 15,000 mortgage loans, bundles them together, and then sells slices of the bundle. This is descriptive of
a.
creating a mortgage-backed security.
b.
creating a mortgage-backed liability.
c.
buying a collateralized debt obligation.
d.
selling a simple loan.
e.
none of the above
58. Collateralized debt obligations are
a.
like mortgage-backed securities except that the slices are equal.
b.
like mortgage-backed securities except that the slices are unequal.
c.
an asset for persons who buy them.
d.
b and c
e.
a and c
59. Which of the following statements is false?
a.
In 2006, some people with subprime and other nontraditional loans were not able to make their monthly
payments on their mortgage loans.
b.
The leverage ratio is the ratio of assets to capital.
c.
John Taylor argued that the global savings glut was the reason for the low interest rates in the early-2000s and
for the rise in housing prices that followed.
d.
It is possible for a bank to have the value of its liabilities greater than the value of its assets.
e.
none of the above
60. Which of the following is more nearly consistent with a global savings glut?
a.
high interest rates and the global savings-World GDP ratio is low
b.
low interest rates and the global savings-World GDP ratio is low
c.
high interest rates and the global savings-World GDP ratio is high
d.
low interest rates and the global savings-World GDP ratio is high
e.
none of the above
61. All other things being equal among the banks below, which bank is the least likely to become insolvent?
a.
Bank A with assets of $100 million and liabilities of $80 million.
b.
Bank B with assets of $100 million and liabilities of $70 million.
c.
Bank C with assets of $200 million and liabilities of $120 million.
d.
Bank D with assets of $400 million and liabilities of $310 million.
e.
Bank E with assets of $100 million and liabilities of $60 million.
62. Suppose the Fed lowers its federal funds rate target. The Fed probably seeks to
a.
lower the actual federal funds rate.
b.
raise the actual federal funds rate.
c.
leave unchanged the actual federal funds rate
d.
b or c
e.
a or c
63. According to Alan Greenspan, the type of inflation that the Taylor Rule is best at addressing is
a.
asset-price inflation
b.
product-price inflation
c.
both asset-price and product-price inflation
d.
demand-induced-one-shot inflation
e.
supply-induced one-shot inflation
64. When the money supply increases at the same time that velocity is decreasing, total spending will
a.
always rise.
b.
always decline.
c.
fall if the decrease in velocity is relatively less than the increase in the money supply.
d.
fall if the decrease in velocity is relatively greater than the increase in the money supply.
65. If M = $1,200 billion and V = 4, then total spending is _______________billion. Then velocity falls to 2 and M rises
to $2,000 billion, so that total spending is now _______________ billion, and GDP has _________________.
a.
$4,800; $4,000; declined
b.
$300; $1,000; risen
c.
$4,800; $4,000; risen
d.
$1,204; $2,002; risen
66. During the Great Recession, the growth rate of Real GDP _________________ and the inflation rate
___________________.
a.
increased; declined
b.
declined; increased
c.
declined; also declined
d.
increased; also increased
67. According to economist Hyman Minsky, Keynesian economics considers _____________________ as determining
economic system behavior.
a.
both asset prices and output prices
b.
asset prices, but not output prices,
c.
output prices, but not asset prices,
d.
neither asset prices nor output prices
68. Define the terms financial sector and real sector. Describe the processes by which a number of banks becoming
insolvent (or approaching insolvency) can have an adverse impact on the real sector.
69. Describe how, according to some economists, the Fed’s actions and the”global savings glut” both contributed to
rising U.S. housing prices in the early 2000s.
70. Describe three of the ways that the U.S. federal government responded to the financial crisis of 2007-2009 and to the
resulting problems in the real sector of the economy. Be sure to include in your answer the government’s specific intent
in each of these actions.
71. Describe the differences between traditional and nontraditional lending practices. Under which category do subprime
loans belong?
