True / False
1. The United States has not experienced a recession as severe as the 2007-2009 downturn since the 1930s.
a.
True
b.
False
True
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
2. The monetary and fiscal stimulus response to the Great Recession resulted in an immediate increase in real GDP.
a.
True
b.
False
False
Moderate
DISC: The role of government
United States – BPROG: Analytic
The role of government
Issue: Did the Fiscal Stimulus Work?
3. In response to the economic downturn, the federal government enacted a fiscal stimulus bill with funding in excess of
$700 billion.
a.
True
b.
False
True
Moderate
DISC: The role of government
United States – BPROG: Analytic
The role of government
Issue: Did the Fiscal Stimulus Work?
4. A larger interest rate spread in 2003-2006 is one of the factors that led to the recession of 2007.
a.
True
b.
False
False
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
5. There is essentially no risk of default for U.S. government securities.
a.
True
b.
False
True
Moderate
6. If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 4.4%, then the spread on this particular
corporate bond is 5.9%.
a.
True
b.
False
False
Moderate
7. During the financial crisis associated with the Great Recession, the interest rate spread between Treasury bills and
bank-to-bank lending increased substantially.
a.
True
b.
False
False
Moderate
8. Subprime mortgages frequently featured small or zero down payments.
a.
True
b.
False
True
Easy
9. Leverage is essential to a bank’s profitability but it also increases risk.
a.
True
b.
False
True
Easy
10. It would be impossible to have an unlevered bank.
a.
True
b.
False
True
Moderate
11. During the real estate boom of the early 2000s, some banks operated with leverage ratios in excess of 30–to–1.
a.
True
b.
False
True
Moderate
12. During the 2000 to 2006 time period, housing prices increased but only to a limited degree.
a.
True
b.
False
False
Easy
13. Spending on newly constructed homes is part of the investment component of GDP.
a.
True
b.
False
True
Moderate
14. In hindsight, mortgage-backed securities implied very limited risk because the underlying mortgages were spread
across different geographic areas.
a.
True
b.
False
False
Moderate
15. The first signs of major financial problems associated with the financial sector and real estate investment appeared in
2009.
a.
True
b.
False
False
Easy
16. Both monetary policy and fiscal policy were used in response to the recession of 2007-2009.
a.
True
b.
False
True
Easy
17. The Federal Reserve helped J.P. Morgan purchased Bear Stearns by agreeing to purchase some unwanted Bear Stearns
assets.
a.
True
b.
False
True
Moderate
18. Borrowed funds are used in financing every component of GDP.
a.
True
b.
False
True
Moderate
19. An increase in the price of a particular bond implies an increase in the interest rate for that bond.
a.
True
b.
False
Moderate
20. In 2008, interest rates on Treasury securities fell even though most other interest rates were rising.
a.
True
b.
False
True
Moderate
21. The increased level of excess reserves that many banks held in 2008 made traditional monetary policy less effective.
a.
True
b.
False
True
Moderate
22. The Fed’s loan that effectively nationalized AIG was approved by Congress.
a.
True
b.
False
False
Moderate
23. The central idea behind the Troubled Asset Relief Program was for the Treasury to sell mortgage-backed securities to
interested investors, wait for prices to increase, and then buy these securities back for a profit.
a.
True
b.
False
False
Moderate
24. Despite both monetary and fiscal policy actions, real GDP declined at an annualized rate of 6% during the last quarter
of 2008 and the first quarter of 2009.
a.
True
b.
False
True
Moderate
25. Most economists feel that overly strict financial regulation from 2000 to 2006 contributed to the financial crisis of
2007-2009.
a.
True
b.
False
False
Easy
26. Expansionary monetary policy is essentially finished once the Fed reduces the federal funds rate to zero.
a.
True
b.
False
False
Moderate
Multiple Choice
27. The recession of 2007-2009 was the most severe economic downturn in the U.S. since the
a.
b.
c.
d.
a
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
The Financial Crisis and the Great Recession
28. A bubble is best defined as
a.
an increase in the price of an asset resulting from fundamentals causes.
b.
an increase in the price of an asset resulting from factors other than fundamentals causes.
c.
a decrease in the price of an asset resulting from fundamentals causes.
d.
a decrease in the price of an asset resulting from factors other than fundamentals causes.
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
29. If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 6.0%, what is the interest rate spread on this
particular corporate bond?
a.
4.0%
b.
4.5%
c.
7.5%
d.
9.0%
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
30. If a 10-year Treasury bond pays 3.1% and a 10-year corporate bond pays 7.4%, what is the interest rate spread on this
particular corporate bond?
a.
4.3%
b.
7.4%
c.
10.5%
d.
22.9%
a
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
31. Which of the following was not a typical characteristic of subprime mortgages?
a.
low down payments
b.
loans to borrowers with poor credit histories
c.
limited incomes with which to make loan payments
d.
fixed interest rates
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Roots of the Crisis
32. What is the leverage implied by the bank balance sheet listed below?
Assets
Liabilities & Net Worth
Reserves
$280,000
Checking deposits
$2,800,000
Loans Outstanding
$2,920,000
Total
$3,200,000
Net Worth
Stockholders’ Equity
$400,000
Total
$3,200,000
a.
2-to-1
b.
7-to-1
c.
8-to-1
d.
10–to-1
c
Difficult
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
33. What is the leverage implied by the bank balance sheet listed below?
Assets
Liabilities & Net Worth
Reserves
$19,000,000
Checking deposits
$20,000,000
Loans Outstanding
$2,000,000
Total
$21,000,000
Net Worth
Stockholders’ Equity
$1,000,000
Total
$21,000,000
a.
10–to-1
b.
12–to-1
c.
20–to-1
d.
21–to-1
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
34. Assuming that the reserve ratio is 10%, what amount of excess reserves are held by with the bank balance sheet listed
below?
Assets
Liabilities & Net Worth
Reserves
$280,000
Checking deposits
$2,800,000
Loans Outstanding
$2,920,000
Total
$3,200,000
Net Worth
Stockholders’ Equity
$400,000
Total
$3,200,000
a.
zero
b.
$240,000
c.
$280,000
d.
$320,000
a
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
35. If the reserve ratio was 10% for the bank with the balance sheet listed below, then this bank is being
Assets
Liabilities & Net Worth
Reserves
$2,500,000
Checking deposits
$5,000,000
Loans Outstanding
$2,000,000
Total
$5,500,000
Net Worth
Stockholders’ Equity
$500,000
Total
$5,500,000
a.
aggressive as indicated by a small amount of excess reserves.
b.
aggressive as indicated by a large amount of excess reserves.
c.
cautious as indicated by a small amount of excess reserves.
d.
cautious as indicated by a large amount of excess reserves.
d
1
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
36. A bank would be considered insolvent when the value of its liabilities exceed its
a.
assets.
b.
required reserves.
c.
actual reserves.
d.
net worth.
a
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk
37. Assume that Sharon purchases $5,000 worth of a stock. To do so she uses $1,000 of her own money and borrows the
remaining $4,000 at a 7.0% interest rate. If the stock’s value decreases by 10% in one year and she has to sell the stock at
that time, what is her rate of return?
a.
−10%
b.
−50%
c.
−78%
d.
−156%
c
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Leverage, Profits, and Risk