Ch 9,10,12

How do banks manage credit​ risk? Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor. Banks can manage credit risk by diversifying their assets. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. All of the above are correct.

All of the above are correct.

What is a lender of last​ resort? The Federal Reserve acts as a lender of last resort. Is an entity that seeks to stop a bank failure from turning into a bank panic by making sure solvent institutions can meet their​ depositors' withdrawal demands. A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. All of the above.

All of the above.

The key accounting equation on which balance sheets are based is given by Assets​ + Shareholders' Equity​ = Liabilities. Assets​ = Liabilities​ + Shareholders' Equity. Assets​ = Liabilities. Assets​ = Liabilities − ​Shareholders' Equity.

Assets​ = Liabilities​ + Shareholders' Equity.

The FDIC stands for the Federal Deposit Insurance Corporation. the Federal Deposit Investment Corporation. the Federal Debt Insurance Corporation. the Foreign Direct Investment Corporation.

the Federal Deposit Insurance Corporation.

Economist Richard Sylla of New York University has argued that in the​ 1790s, Secretary of the Treasury Alexander Hamilton "established the financial foundations that would make the United States the most successful emerging market in the nineteenth​ century, and the economic colossus of the next that some would call the​ 'American ​century.'" Sylla would focus on all of the following "financial foundations" of the United​ States, except: Investor confidence in the credit of the United States. The issuance of currency. The establishment of a central bank. The creation of stock and bond markets.

The issuance of currency.

Loan sales is a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. activities that include trading in the​ futures, options, or swaps market. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

Standby letters of credit are activities that include trading in the​ futures, options, or swaps market. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures.

​Off-balance-sheet activities are activities that do not affect a​ bank's balance sheet because they do not increase a​ bank's profit. activities that are illegal and cannot be reflected in a​ bank's balance sheet. activities that take place outside the​ bank, such as operations with​ ATMs, electronic banking and so on. activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities.

activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities.

Trading activities are a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. activities that include trading in the​ futures, options, or swaps market. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

activities that include trading in the​ futures, options, or swaps market.

Loan commitment is a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. activities that include trading in the​ futures, options, or swaps market. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures.

a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

Suppose that Bank of America sells $10 million in Treasury bills to PNC Bank. Use​ T-accounts to show the effect of this transaction on the balance sheet of each bank.

see t-accounts

The World Bank measures financial development​ by: the total amount of outstanding debt. the number of banks and financial institutions. the total amount of savings in household and business accounts. the total amount of credit banks and financial markets extend to households and firms as a percentage of GDP.

the total amount of credit banks and financial markets extend to households and firms as a percentage of GDP.

When was TARP​ created? 2008. 1934. 1913. 2007.

2008.

How does the lemons problem lead many firms to borrow from banks rather than from individual​ investors? ​(Check all that​ apply.) Because banks specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers. Because banks have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept. Because potential investors have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept. Because potential investors specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers.

Because banks specialize in gathering​ information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers. Because potential investors have difficulty in distinguishing good borrowers from bad​ borrowers, they offer good borrowers terms they are reluctant to accept.

​"If a bank manager expects interest rates to fall in the​ future, he should increase the duration of his​ bank's liabilities." Do you agree with this​ statement? Disagree. The manager should not change the duration of his​ bank's liabilities. Agree. The manager should increase the duration of his​ bank's liabilities. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital. There is not enough information to evaluate the​ manager's actions.

Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital.

Which of the following might explain why a country without a strong financial system would struggle to achieve high rates of economic​ growth? Households and firms have too much debt. Firms are unable to acquire funds they need to expand. Funds flow from savers directly to entrepreneurs without going through an intermediary. ​Lower-yields on savings and investments.

Firms are unable to acquire funds they need to expand.

What might be some of the consequences of banks having insufficient​ capital? Insolvency. High profits. A wide range of clients. Low profits.

Insolvency.

An article in the Wall Street Journal in 2016 referred to the past 35 years as "the biggest bond bull market in history." What does the article mean by a bull market in​ bonds? Bond prices were lower than normal. Bonds were paying higher levels of interest. Investors were taking their money out of the bond market. Investors were increasing their demand for bonds.

Investors were increasing their demand for bonds.

How are they​ related? ROA is equal to ROE divided by the ratio of bank capital to bank assets. ROE is equal to ROA multiplied by the ratio of bank assets to bank capital. ROE is equal to ROA multiplied by the ratio of bank capital to bank assets. ROA is equal to ROE multiplied by the ratio of bank assets to bank capital.

ROE is equal to ROA multiplied by the ratio of bank assets to bank capital.

Suppose First National Bank has ​$200 million in assets and ​$20 million in equity capital. -If First National has a 2​% ​ROA, what is its​ ROE? ​(Enter your answer rounded to two decimal places​). ROE= 20​% -Now suppose First​ National's equity capital declines to ​$10 ​million, while its assets and ROA are unchanged. What is First​ National's ROE​ now?​ (Enter your answer rounded to two decimal places​) ​ROE= 40​%

ROE= 20% ROE= 40%

Commercial real estate loans are mortgages that use apartment​ buildings, office​ buildings, or other commercial real estate as collateral. An article in the New York Times discussing the securitization of commercial real estate loans makes the following​ observation: The boom in commercial​ mortgage-backed securities in the middle of the last decade provided a lot of money for​ underwriters, enabled banks to earn fees from making and servicing bad loans and allowed property owners to withdraw large amounts of cash. The losers were the investors... s it likely that the interest rates on these securities were high enough to compensate investors for the additional risk involved with these​ securities? Briefly explain. The interest rates would have been high enough to compensate investors for the additional risk if the rating agencies had accurately assessed the​ risks; unfortunately, the agencies underperformed. It is not likely that the interest rates on these securities were high enough given the financial meltdown that​ ensued; hindsight​ is, of​ course, 20-20. The interest rates were​ "spot on" given the risks involved. Investors just got too greedy. A and B are correct.

A and B are correct.

Why was it​ [FDIC] established? The FDIC was established to ameliorate bank runs. The FDIC was established in 1913 together with Fed The FDIC was established in 1934 after a series of bank failures. A and C are correct.

A and C are correct.

What are the two methods that governments typically use to avoid bank​ panics? ​(Check all that apply.​) The government can nationalize banks. A central bank can act as a lender of last resort. The government can increase the refinance rate. The government can insure deposits.

A central bank can act as a lender of last resort. The government can insure deposits.

The classic account of bank panics was published in 1879 by Walter​ Bagehot, editor of the Economist​, in his book Lombard Street​: "In wild periods of​ alarm, one failure makes​ many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." What are the two main ways in which the government can keep one bank failure from leading to a bank​ panic? A central bank can act as a borrower of last resort and insure deposits. A central bank can act as a borrower of last​ resort, and the government can insure deposits. A central bank can act as a lender of last​ resort, and the government can insure deposits. A central bank can act as a lender of last resort and insure deposits.

A central bank can act as a lender of last​ resort, and the government can insure deposits.

Economist Richard Sylla of New York University has argued that in the​ 1790s, Secretary of the Treasury Alexander Hamilton "established the financial foundations that would make the United States the most successful emerging market in the nineteenth​ century, and the economic colossus of the next that some would call the​ 'American ​century.'" All of the following are reasons why these financial foundations were important in making possible the rapid growth of the U.S. economy during the nineteenth and twentieth​ centuries, except: A central bank provided direct control over all interest​ rates, facilitating the control and direction of the overall economy. A central bank made loans more widely available to businesses and inspired state governments to allow other private banks to be established. The financial system provided a way for funds to flow from savers to entrepreneurs establishing and expanding new businesses. Once financial markets were​ organized, they provided corporations with a way to raise funds and investors with a way to participate in the growth of the economy.

A central bank provided direct control over all interest​ rates, facilitating the control and direction of the overall economy.

In their book This Time Is Different​, Carmen Reinhart and Kenneth Rogoff​ conclude: ​"An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset​ prices, output, and​ employment." Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis? When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can increase, further affecting real output. A recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which affects the economy for a longer time period than a traditional recession. Both A and B are correct. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.

A recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which affects the economy for a longer time period than a traditional recession.

A reader wrote to an advice column in the New York Times complaining that his insurance company canceled his​ homeowner's policy after he had filed two claims. The advice columnist discovered that "a lot of people have shared a version of​ [this man's] experience ... a couple of small claims ... then nonrenewal." By canceling these​ people's policies, insurance companies are attempting to avoid

Adverse selection

An article in the Economist magazine​ observes: ​"Insurance companies often suspect the only people who buy insurance are the ones most likely to​ collect." What do economists call the problem being described​ here? Adverse selection. Moral hazard. ​Principal-agent problem. All of the above.

Adverse selection

What is the difference between moral hazard and adverse​ selection? [ ] occurs when bad risks are more likely to​seek/accept a financial contract than are good risks. [ ]occurs in financial markets when borrowers use borrowed funds differently than they would have used their own funds.

Adverse selection; Moral hazard

​"A bank that expects interest rates to fall will want the duration of its assets to be greater than the duration of its liabilities​ - a positive duration​ gap." Do you agree with this​ statement? Agree. A fall in interest rates with a positive duration gap will increase the number of deposits. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital. Disagree. The bank does not care about the duration gap during interest movements. Disagree. A fall in interest rates with a positive duration gap will decrease profits.

Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital.

​"A bank that expects interest rates to increase in the future will want to hold more​ rate-sensitive assets and fewer​ rate-sensitive liabilities." Do you agree with this​ statement? Disagree. In any​ case, it is more profitable for banks to reduce the number of​ rate-sensitive assets and​ liabilities, and increase assets and liabilities with fixed interest. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease​ interest-rate risk. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits. Disagree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease bank profits.

Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits.

A Congresswoman introduces a bill to outlaw credit rationing by banks. The bill would require that every applicant be granted a​ loan, no matter how high the risk that the applicant would not pay back the loan. She defends the bill by​ arguing: There is nothing in this bill that precludes banks from charging whatever interest rate they would like on their​ loans; they simply have to give a loan to everyone who applies. If the banks are​ smart, they will set their interest rates so that the expected return on each loan—after taking into account the probability that the applicant will default on the loan—is the same. Evaluate the​ Congresswoman's argument and the likely effects of the bill on the banking system. Forcing banks to lend but saying they can charge whatever interest rate necessary does not provide an incentive for people to use the money properly. The problem with this bill is that it creates moral hazard. Forcing banks to lend but saying they can charge whatever interest rate necessary does not provide an incentive for people to repay the loan. All answers are correct.

All answers are correct.

Describe some of the information problems in the financial system that lead firms to rely more heavily on internal funds than external funds to finance their growth. Do these information problems imply that firms are able to spend less on expansion than is economically​ optimal? Asymmetric information makes information costs for external funds higher than for internal​ funds, and these costs necessarily imply that firms are able to spend less on expansion than is economically optimal. The information problems have to do with the inability of borrowers to directly link up with savers​ which, as a​ consequence, causes firms to spend less on expansion than is economically optimal. Asymmetric information makes information costs for internal funds higher than for external​ funds, but these costs do not necessarily imply that firms are able to spend less on expansion than is economically optimal. Asymmetric information makes information costs for external funds higher than for internal​ funds, but these costs do not necessarily imply that firms are able to spend less on expansion than is economically optimal.

Asymmetric information makes information costs for external funds higher than for internal​ funds, but these costs do not necessarily imply that firms are able to spend less on expansion than is economically optimal.

What is the difference between a​ bank's return on assets​ (ROA) and its return on equity​ (ROE)? A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital.

A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital.

In July​ 2010, Congress was considering having the federal government set up a​ "lending fund" for small banks. The U.S. Treasury would lend the funds to banks. The more of the funds the banks loaned to small​ businesses, the lower the interest rate the Treasury would charge the banks on the loans. Congressman Walt Minnick of Idaho was asked to comment on whether the bill would be helpful to small businesses. Here is part of his​ response: ​"The bank​ that's struggling to write down their commercial real estate assets is having to take a hit to​ capital, and this provides replacement capital on​ very, very favorable terms. So it deals with the left side of the balance​ sheet..." b. Does a​ bank's capital appear on the left side of the​ bank's balance​ sheet? Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities. Bank capital appears on the left side of the balance​ sheet, because it is the difference between liabilities and assets. Bank capital appears on the left side of the balance sheet because it is the difference between assets and liabilities. ​Bank's capital does not appear in the balance sheet.

Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities.

In academic research published before he entered​ government, Fed Chairman Ben Bernanke​ wrote: ​[In] a system without deposit​ insurance, depositor runs and withdrawals deprive banks of funds for​ lending; to the extent that bank lending is specialized or information​ sensitive, these loans are not easily replaced by nonbank forms of credit. What does it mean to say that bank lending is​ "information sensitive"? ​Banks' lending is highly sensitive to the information about the interest rate. Savers can easily withdraw their deposits based on the information about the yield. Banks acquire information to decide if borrowers are creditworthy. None of the above.

Banks acquire information to decide if borrowers are creditworthy.

How do banks manage liquidity​ risk? ​(Check all that apply.​) Banks can increase their borrowings to cover liquidity risk. Banks can increase their assets to cover liquidity risk. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement.

Banks can increase their borrowings to cover liquidity risk. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement.

How do banks manage​ interest-rate risk? ​(Check all that apply.​) Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. ​Interest-rate swaps can reduce​ interest-rate risk exposure. Banks can manage​ interest-rate risk by keeping some funds as repurchase agreements. Banks can increase their borrowings to manage​ interest-rate risk.

Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. ​Interest-rate swaps can reduce​ interest-rate risk exposure.

In academic research published before he entered​ government, Fed Chairman Ben Bernanke​ wrote: ​[In] a system without deposit​ insurance, depositor runs and withdrawals deprive banks of funds for​ lending; to the extent that bank lending is specialized or information​ sensitive, these loans are not easily replaced by nonbank forms of credit. Why would bank lending being​ "information sensitive" make it difficult to replace with nonbank forms of​ credit? Banks have economies of scale or some other advantage in evaluating the riskiness of loans. Nonbanks have economies of scale or some other advantage in evaluating the riskiness of loans. Providers of credit are able to provide risk assessment just as well as banks. Both B and C are correct.

Banks have economies of scale or some other advantage in evaluating the riskiness of loans.

Commercial real estate loans are mortgages that use apartment​ buildings, office​ buildings, or other commercial real estate as collateral. An article in the New York Times discussing the securitization of commercial real estate loans makes the following​ observation: The boom in commercial​ mortgage-backed securities in the middle of the last decade provided a lot of money for​ underwriters, enabled banks to earn fees from making and servicing bad loans and allowed property owners to withdraw large amounts of cash. The losers were the investors.... Why would banks make bad commercial real estate​ loans? Don't banks lose money if these loans​ default? Banks often make bad loans because they are required by government to lend money to​ sub-prime borrowers, and they suffer losses​ that, in​ turn, require government bailouts. Banks might make bad loans if potential losses on the loans are borne by entities other than the banks. Banks never make bad​ loans; loans only become bad when unforeseen shocks to the economy​ occur, and banks do incur losses in these cases. Banks might make bad loans if they do a poor job of assessing the creditworthiness of​ borrowers, but they nevertheless do not incur losses because of tax write offs.

Banks might make bad loans if potential losses on the loans are borne by entities other than the banks.

In the adjacent​ figure, countries that are above the upward sloping line have relatively high levels of real GDP per capita for their levels of financial development and countries that are below the line have relatively low levels of real GDP per capita for their levels of financial development. Holding constant all other factors that might affect a​ country's rate of economic​ growth, would we expect future growth rates to be higher for countries above the line or for countries below the​ line? Above the line because past performance is a reliable indicator of future performance. Above the line because these countries have underperformed so far given the strength of their financial system. Below the line because these countries have underperformed so far given the strength of their financial system. Below the line because poor performance in the past provides greater room for improvement in the future.

Below the line because these countries have underperformed so far given the strength of their financial system.

In academic research published before he entered​ government, Fed Chairman Ben Bernanke​ wrote: ​[In] a system without deposit​ insurance, depositor runs and withdrawals deprive banks of funds for​ lending; to the extent that bank lending is specialized or information​ sensitive, these loans are not easily replaced by nonbank forms of credit. Does​ Bernanke's observation help to explain the role bank panics played in the severity of the Great​ Depression? ​Yes, Bernanke's observation helps to explain the role bank panics played in the severity of the Great Depression. ​No, Bernanke's observation​ doesn't help to explain the role bank panics played in the severity of the Great Depression. When thousands of banks​ failed, it became difficult for their customers to obtain​ credit, thus exacerbating the severity of the Great Depression. Both A and C are correct.

Both A and C are correct.

Former Federal Reserve Chair Ben Bernanke has observed​ that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." What does he mean by a "sustained run"​? Why​ can't a bank by itself survive a sustained​ run? By​ "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated. By​ "sustained run," Bernanke means a bank run that lasts for a short period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated. By​ "sustained run," Bernanke means a process by which simultaneous deposits result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposits and its assets are long term and not easily liquidated. By​ "sustained run," Bernanke means a process by which simultaneous devaluation of assets result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated.

By​ "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated.

The following entries​ (in millions of​ dollars) are from the balance sheet of Rivendell National Bank​ (RNB): [table] If​ RNB's assets have an average duration of four years and its liabilities have an average duration of three ​years, what is​ RNB's duration​ gap?

Duration gap​ = 1

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." In what sense might deposit insurance be considered a federal subsidy for​ banks? FDIC insurance protects every dollar deposited in a bank. FDIC insurance is backed by the full faith and credit of the United States government. FDIC insurance provides cash subsidies to banks in times of trouble. FDIC insurance is paid for with federal tax dollars.

FDIC insurance is backed by the full faith and credit of the United States government.

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." Despite these potential​ drawbacks, economists and members of Congress overwhelmingly support deposit insurance for all of the following​ reasons, except: FDIC monitors and addresses risks to deposit insurance funds. FDIC promotes public confidence in the U.S. financial system. FDIC protects every dollar a customer has in a bank. FDIC limits the effect on the economy when a bank fails.

FDIC protects every dollar a customer has in a bank.

A reader wrote to an advice column in the New York Times complaining that his insurance company canceled his​ homeowner's policy after he had filed two claims. The advice columnist discovered that "a lot of people have shared a version of​ [this man's] experience ... a couple of small claims ... then nonrenewal." Why​ don't insurance companies just raise the annual premiums they charge instead of canceling​ policies? Higher rates will attract riskier people to buy policies and discourage safer people. Changing the rate would have no impact on the type of person that would apply for insurance it would just lead to fewer people buying policies. Changing the rate would have no impact on the type of person that would apply for insurance would have no impact on profits. Higher rates will attract only safer people and the insurance companies want risky people also.

Higher rates will attract riskier people to buy policies and discourage safer people.

The classic account of bank panics was published in 1879 by Walter​ Bagehot, editor of the Economist​, in his book Lombard Street​: "In wild periods of​ alarm, one failure makes​ many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." All of the following are reasons why one bank failure might lead to many bank​ failures, except: Depositors of other banks may become concerned that their banks might also have problems. Banks will be forced to sell loans and securities to raise money to pay off depositors. Depositors have an incentive to withdraw their money from their banks to avoid losing it should their banks be forced to close. If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise.

If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." In what ways is the market for rental apartments like the market for used​ cars? Neither the rental apartment market nor the used car market face the​ "lemons problem." In both​ markets, the owner knows more than the potential renter or buyer. In both​ markets, the​ "lemons" are the responsibility of the renter or buyer forever. The market for rental apartments is not similar to the market for used cars.

In both​ markets, the owner knows more than the potential renter or buyer.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." In what ways is the market for rental apartments like the market for used​ cars? Neither the rental apartment market nor the used car market face the​ "lemons problem." In both​ markets, the​ "lemons" are the responsibility of the renter or buyer forever. In both​ markets, the owner knows more than the potential renter or buyer. The market for rental apartments is not similar to the market for used cars

In both​ markets, the owner knows more than the potential renter or buyer.

A columnist writing in the Wall Street Journal​ observed: "Franklin D.​ Roosevelt's March 1933 inaugural line​ 'that the only thing we have to fear is fear​ itself' was​ inspiring, but wrong. There was plenty to​ fear, not least the deflation that then gripped the nation". Was deflation during the early 1930s good or bad for​ firms? It was bad because it effectively raised interest rates. It was good because it effectively lowered interest rates. It had no effect on firms. It was good because the supply of loans increased.

It was bad because it effectively raised interest rates.

An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy​ noted: If Bear Stearns​ failed, for​ example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. How did the Federal Reserve rescue Bear​ Stearns? The Federal Reserve arranged a buyout of Bear Stearns by JP Morgan Chase. Citibank. Lehman Brothers. Bank of America.

JP Morgan Chase.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." If the statement is​ correct, what are the implications for the market for rental​ apartments? Landlords will attempt to charge a lower price than they otherwise would receive in the absence of this information asymmetry. The market faces the possibility of the​ principal-agent problem. Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry. The statement is not correct​ and, thus, there are no implications for the market for rental apartments.

Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry.

According to an article in the Wall Street Journal​, in 2016 J.P. Morgan​ Chase's leverage ratio was 6.2​%. The​ bank's return on equity was 9​%. Calculate the​ bank's ROA.

The banks ROA was .558​%. ​(Enter your response rounded to three decimal​ places.)

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." If the statement is​ correct, what are the implications for the market for rental​ apartments? The market faces the possibility of the​ principal-agent problem. Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry. Landlords will attempt to charge a lower price than they otherwise would receive in the absence of this information asymmetry. The statement is not correct​ and, thus, there are no implications for the market for rental apartments.

Landlords will attempt to charge a higher price than they otherwise would receive in the absence of this information asymmetry.

Aaron​ Levie, one of the founders of the Internet​ file-sharing site​ Box, Inc. explained the difficulty the firm had in raising funds from​ investors: "...investors had a hard time investing in a company where the founders acted​ 40, were 19 and looked 12. They thought​ we'd run off to Disneyland with the funding money." All of the following help explain why this problem might be less likely with larger established firms than with small​ startups, except Larger firms have a higher opportunity cost of running off with money inappropriately. Larger firms have established histories that lenders can reference while startups have less available information. Large firms do not face a​ principal-agent problem. Large firms have a separation of ownership from control.

Large firms do not face a​ principal-agent problem.

In his​ memoirs, Herbert Hoover described the reaction of his Treasury Secretary to the Great​ Depression: First was the​ "leave it alone​ liquidationists" headed by Secretary of the Treasury​ Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one​ formula: "Liquidate​ labor, liquidate​ stocks, liquidate the​ farmers, liquidate real​ estate." What does​ "liquidate" mean in this​ context? Liquidate means to let prices fall to their equilibrium level. Liquidate means to encourage struggling firms to expand. Liquidate means to redistribute the assets and property of a business. Both A and B are correct.

Liquidate means to let prices fall to their equilibrium level.

Which from the following are​ off-balance-sheet activities? ​(Check all that​ apply.) Loan commitment. Trading activities. Loan sales. Issuing credits. Increase in reserve requirements. Standby letters of credit.

Loan commitment. Trading activities. Loan sales. Standby letters of credit.

Which of the following is a correctly explained key feature of the financial​ system? ​(Check all that​ apply.) The bond market is a less important source of external funds to corporations than is the stock market. This is because there is less moral hazard involved with stocks than with bonds. Loans from financial intermediaries are the most important external source of funds for​ small- to​ medium-sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms. Trade credit is the most important external source of funds for​ small- to​ medium-sized firms. Trade credit can reduce the transaction costs of borrowing for small firms. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce adverse selection. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks.

Loans from financial intermediaries are the most important external source of funds for​ small- to​ medium-sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks.

What is the most important source of external funds to​ small- to​ medium-sized firms? Loans from financial intermediaries. Trade credit. The​ owners' personal funds. Loans from the federal​ government's Small Business Administration.

Loans from financial intermediaries.

An article in the Wall Street Journal in 2016 referred to the past 35 years as "the biggest bond bull market in history." How does the graph indicate that there was a bull market in bonds during the time period​ shown? Higher interest rates indicate the investors could make a better profit on bonds than stocks. Lower interest rates indicate that investors could make more profit on stocks than on bonds. Lower interest rates indicate that bond prices were​ rising, an indication of a bull market. Higher interest rates indicate that bond prices were​ falling, an indication of a bull market.

Lower interest rates indicate that bond prices were​ rising, an indication of a bull market.

Aaron​ Levie, one of the founders of the Internet​ file-sharing site​ Box, Inc. explained the difficulty the firm had in raising funds from​ investors: "...investors had a hard time investing in a company where the founders acted​ 40, were 19 and looked 12. They thought​ we'd run off to Disneyland with the funding money." What do economists call the problem Levie​ encountered? Moral hazard. Asymmetric information. The Theranos Syndrome. Adverse selection.

Moral Hazard

An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in​ 2010: ​"The global house price bubble was a consequence of lower interest​ rates, but it was​ long-term interest rates that galvanized home asset​ prices, not the overnight rates of central​ banks, as has become the seemingly conventional​ wisdom." Why would​ long-term interest rates have a closer connection to house prices than overnight interest​ rates? Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. The average holding of a house is 30 years. The Fed can control and change​ long-term interest rates more easily than​ short-term interest rates. Housing purchases are typically​ short-term investments.

Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield.

Suppose that National Bank of Guerneville has ​$33 million in checkable​ deposits, Commonwealth Bank has ​$47 million in checkable​ deposits, and the required reserve ratio for checkable deposits is​ 10%. If National Bank of Guerneville has​ $4 million in reserves and Commonwealth has​ $5 million in​ reserves, how much in excess reserves does each bank​ have? ​(Enter your answers rounded to one decimal​ place.)

National Bank of Guerneville has ​[$ .7] million in excess reserves. Commonwealth Bank has ​[$ .3] million in excess reserves. Now suppose that a customer of National Bank of Guerneville writes a check for ​$2 million to a real estate broker who deposits the check at Commonwealth. After the check​ clears, how much in excess reserves does each bank​ have? National Bank of Guerneville has ​[$-1.1] million in excess reserves. Commonwealth Bank has ​[$2.1] million in excess reserves.

In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​) Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow long and lend short. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. Nonbank financial institutions are required to maintain the equivalent of reserve requirements.

Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC.

Commercial real estate loans are mortgages that use apartment​ buildings, office​ buildings, or other commercial real estate as collateral. An article in the New York Times discussing the securitization of commercial real estate loans makes the following​ observation: The boom in commercial​ mortgage-backed securities in the middle of the last decade provided a lot of money for​ underwriters, enabled banks to earn fees from making and servicing bad loans and allowed property owners to withdraw large amounts of cash. The losers were the investors... Why would investors buy securities that contain bad commercial real estate​ loans? Investors might buy securities containing bad loans if securities are misrepresented. Investors might buy securities containing bad loans if they are risk​ "enthusiasts." Inaccurate rating agency judgements may cause investors to buy securities containing bad loans. All of the above. Only A and C are plausible.

Only A and C are plausible.

Suppose First National Bank has ​$260 million in assets and ​$26 million in equity capital. -If First National has a 3​% ​ROA, what is its​ ROE? ​(Enter your answer rounded to two decimal places​). ROE= -Now suppose First​ National's equity capital declines to ​$13 ​million, while its assets and ROA are unchanged. What is First​ National's ROE​ now?​ (Enter your answer rounded to two decimal places​) ​ROE=

ROE= 30% ROE= 60%

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." From this​ perspective, why might there be too few bank failures as the result of deposit​ insurance? Banks are so large now that they are too big to fail. Conservative money management on the part of bank managers reduces the risk of failing. Banks are prevented from taking on risks that might cause them to fail. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out.

Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out.

The most important bank assets are Real estate loans and U.S.​ government/agency securities. Consumer loans and Reserves. Real estate loans and​ Commercial/industrial loans. Reserves and Real estate loans.

Real estate loans and U.S.​ government/agency securities.

Suppose that​ Lena, who has an account at SunTrust​ Bank, writes a check for ​$150 to​ Jose, who has an account at National City Bank.

See t-accounts

Why was it​ [TARP] created? TARP was created to restore the market for​ mortgage-backed securities and other toxic assets in order to provide relief to financial firms that had trillions of dollars worth of these assets on their balance sheets. It was established after a series of bank failures during the Great Depression. TARP was established in 1913 in conjunction with the Fed. It was established to ameliorate bank runs by the public.

TARP was created to restore the market for​ mortgage-backed securities and other toxic assets in order to provide relief to financial firms that had trillions of dollars worth of these assets on their balance sheets.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." In what ways is it​ different? The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal. The rental apartment market faces the​ "lemons problem," while the used car market does not. The used car market faces the​ "lemons problem," while the rental apartment market does not. There is no difference between the rental apartment market and the used car market.

The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." In what ways is it​ different? The used car market faces the​ "lemons problem," while the rental apartment market does not. The rental apartment market faces the​ "lemons problem," while the used car market does not. The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal. There is no difference between the rental apartment market and the used car market.

The landlord is not selling the​ apartment, merely renting​ it, while the buyer of a used car makes an irreversible deal.

Consider the possibility of income insurance. With income​ insurance, if a person loses his job or​ doesn't get as big a raise as​ anticipated, he would be compensated under his insurance coverage. Why​ don't insurance companies offer income insurance of this​ type? ​(Check all that​ apply.) The problem is adverse selection​ (once insured, you​ won't work as​ hard). This type of insurance would be unpopular among workers. The problem is adverse selection​ (people who are more likely to be fired or get low raises would be more likely to buy such​ insurance). The problem is moral hazard​ (once insured, you​ won't work as​ hard). The problem is moral hazard​ (people who are more likely to be fired or get low raises would be more likely to buy such​ insurance).

The problem is adverse selection​ (people who are more likely to be fired or get low raises would be more likely to buy such​ insurance). The problem is moral hazard​ (once insured, you​ won't work as​ hard).

Commercial real estate loans are mortgages that use apartment​ buildings, office​ buildings, or other commercial real estate as collateral. An article in the New York Times discussing the securitization of commercial real estate loans makes the following​ observation: The boom in commercial​ mortgage-backed securities in the middle of the last decade provided a lot of money for​ underwriters, enabled banks to earn fees from making and servicing bad loans and allowed property owners to withdraw large amounts of cash. The losers were the investors.... What is​ securitization? The practice of​ "securing" payments from borrowers by requiring a pledge of collateral. The process of converting securities that are not tradable into securities that are tradable. The practice of insuring assets against default loss. The process of converting loans and other financial assets that are not tradable into securities.

The process of converting loans and other financial assets that are not tradable into securities.

Former Federal Reserve Chair Ben Bernanke has observed​ that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." What does Bernanke mean by "solvent under normal conditions"​? The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive.

The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive.

What is the most important source of funds to​ small- to​ medium-sized firms? Banks loans​ (other than​ mortgages). Trade credit. Government grants and subsidized loans. The​ owners' personal funds and profits.

The​ owners' personal funds and profits.

The Capital Purchase Program carried out under TARP represented an attempt by the federal government to increase the capital of banks. Why would the federal government consider it important to increase bank​ capital? To keep banks with falling asset values solvent. To raise​ banks' profits. To keep inflation low. To keep attracting new clients.

To keep banks with falling asset values solvent.

An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in​ 2010: ​"The global house price bubble was a consequence of lower interest​ rates, but it was​ long-term interest rates that galvanized home asset​ prices, not the overnight rates of central​ banks, as has become the seemingly conventional​ wisdom." Why would it matter to Greenspan whether low​ long-term interest rates were more responsible for the housing bubble than low​ short-term interest​ rates? To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates. Buying a house is linked with​ short-term borrowings, which were insured by​ mortgage-backed securities. ​Mortgage-backed securities are usually​ short-term loans. All of the above.

To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates.

An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy​ noted: If Bear Stearns​ failed, for​ example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. Why did Bear Stearns almost​ fail? ​(Check all that​ apply.) because Bear liquidated assets in order to pay back​ short-term loans because lenders lost faith in​ Bear's ability to pay back​ short-term loans because lenders declined to renew​ Bear's short-term loans because lenders lost faith in​ Bear's ability to pay back​ long-term loans because Bear liquidated assets in order to pay back​ long-term loans

because Bear liquidated assets in order to pay back​ short-term loans because lenders lost faith in​ Bear's ability to pay back​ short-term loans because lenders declined to renew​ Bear's short-term loans

An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy​ noted: If Bear Stearns​ failed, for​ example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. The​ debt-deflation process is the process of [ ] that can increase the severity of an economic downturn.

falling prices of goods and services

The​ debt-deflation process is the process of [ ] that can increase the severity of an economic downturn. The​ debt-deflation process contributed to the severity of the Great Depression by increasing the real interest rate and the real value of​ debts, which [ ] the burden on borrowers and led to [ ] loan defaults.

falling prices of goods and services (or) increasing bankruptcies and defaults; increasing; more

The World​ Bank's data tells us that countries with higher levels of financial development tend to have [ ] levels of real GDP per​ capita, which indicates they are [ ] able to provide a high standard of living for their residents.

higher; better

An article in the Economist magazine​ observes: ​"Insurance companies often suspect the only people who buy insurance are the ones most likely to​ collect." If insurance companies are correct in their​ suspicion, it will [ ] the price of insurance.

increase

In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. What does Greenspan mean that​ "the added risk had not been compensated by higher​ capital"? In order to compensate for the​ risk, Greenspan believes that nonbank financial institutions should have voluntarily decreased excess reserves. increased the interest rate. decreased their debt. increased their capital.

increased their capital.

A bank run is a reduction of the interest below zero. involves a bank increasing its holdings of demand deposits. is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close. occurs when the majority of commercial banks in the country withdraw their reserve funds from the central bank. Does a bank have to be insolvent to experience a​ run?

is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close. No

A columnist writing in the Wall Street Journal​ observed: "Franklin D.​ Roosevelt's March 1933 inaugural line​ 'that the only thing we have to fear is fear​ itself' was​ inspiring, but wrong. There was plenty to​ fear, not least the deflation that then gripped the nation". All of the following are reasons why deflation might not be good for​ consumers, except: it causes lower interest rates. it causes nominal wage cuts. it causes a higher burden of debt ratio. it causes higher interest rates.

it causes lower interest rates.

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." What does it mean to describe deposit insurance as undermining "market discipline"​? Because [ ] depositors are fully​ insured, they have [ ] incentive to withdraw their money and cause their bank to fail. This encourages [ ] by bank managers as depositors are protected [ ] how the bank actually performs.

most; little; risk-taking; regardless of

An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in​ 2010: ​"The global house price bubble was a consequence of lower interest​ rates, but it was​ long-term interest rates that galvanized home asset​ prices, not the overnight rates of central​ banks, as has become the seemingly conventional​ wisdom." A house price bubble occurs when house prices move beyond their fundamental values. means that asset prices have decreased below the point that could be justified by fundamental evaluation. means that the decline in the housing market caused a decrease not only in spending on residential​ construction, but also affected markets for furniture and appliances. means that asset prices have increased beyond the point that could be justified by property appraisers.

occurs when house prices move beyond their fundamental values.

An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy​ noted: If Bear Stearns​ failed, for​ example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. Does this process provide any insight into why the Federal Reserve rescued Bear​ Stearns? ​(Check all that apply.​) A​ debt-deflation process does not provide any insight into why the Federal Reserve rescued Bear Stearns. pushes down the price of those assets which other investment banks​ hold, thus worsening their balance​ sheets, which in turn can accelerate bankruptcies. would occur if Bear Stearns goes bankrupt and has to sell its assets. pushes up the price of those assets which other investment banks​ hold, thus worsening their balance sheets.

pushes down the price of those assets which other investment banks​ hold, thus worsening their balance​ sheets, which in turn can accelerate bankruptcies. would occur if Bear Stearns goes bankrupt and has to sell its assets.

In academic research published before he entered​ government, Fed Chairman Ben Bernanke​ wrote: ​[In] a system without deposit​ insurance, depositor runs and withdrawals deprive banks of funds for​ lending; to the extent that bank lending is specialized or information​ sensitive, these loans are not easily replaced by nonbank forms of credit. Nonbank forms of credit refer to credits issued by one commercial bank to another commercial bank. are credits issued by the Fed. refer to credit from providers other than banks. are credits issued by the U.S. Treasury.

refer to credit from providers other than banks.

The​ "lemons problem" refers to the adverse selection problem that arises from asymmetric information. refers to either the adverse selection or moral hazard problem that arises from asymmetric information. refers to the moral hazard problem that arises from asymmetric information. is a problem that buyers of used cars​ face, but there is no such problem in the financial market.

refers to the adverse selection problem that arises from asymmetric information.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." Do you agree with this​ statement? If​ so, what do landlords know that potential renters might​ not? Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters. ​Agree; Landlords know that the price of any property will always fall in the future. ​Disagree; Landlords​ don't know more than the potential renter. ​Disagree; Renters know more about their​ income, and thus what they are able to afford.

​Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters.

The author of a newspaper article providing advice to renters observes that​ "landlords will always know more than you​ do." Do you agree with this​ statement? If​ so, what do landlords know that potential renters might​ not? ​Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters. ​Disagree; Renters know more about their​ income, and thus what they are able to afford. ​Agree; Landlords know that the price of any property will always fall in the future. ​Disagree; Landlords​ don't know more than the potential renter.

​Agree; Landlords know more about the quality of the​ property, and hence its true​ value, than renters.

Wall Street Journal columnist Brett Arends offered the opinion that​ "as a rule of​ thumb, the more complex a​ [financial] product​ is, the worse the​ deal." Do you​ agree? Why would a more complex financial product be likely to be a worse deal for an investor than a simpler​ product? ​Agree; When investors buy simpler​ products, they typically have more information and can make more informed choices about the products. ​Agree; The more complex deal is often one for which information costs​ decrease, which then reduces the resulting profit from the deal. ​Agree; The more complex the​ product, the easier it is for an investor to assess the risk of the product. ​Disagree; A more complex financial product is likely to be guaranteed by its issuer.

​Agree; When investors buy simpler​ products, they typically have more information and can make more informed choices about the products.

An article in the Wall Street Journal in 2016 referred to the past 35 years as "the biggest bond bull market in history." The article also notes​ that: "Bonds are meant to be​ safe, dull investments." Which of the following is a risk bond investors buying bonds during a​ bull-market are most likely to​ face? Decrease in value of the underlying stock. ​Interest-rate risk. ​Short-term bonds replacing​ long-term bonds. None—bonds are backed by FDIC insurance.

​Interest-rate risk.

In July​ 2010, Congress was considering having the federal government set up a​ "lending fund" for small banks. The U.S. Treasury would lend the funds to banks. The more of the funds the banks loaned to small​ businesses, the lower the interest rate the Treasury would charge the banks on the loans. Congressman Walt Minnick of Idaho was asked to comment on whether the bill would be helpful to small businesses. Here is part of his​ response: ​"The bank​ that's struggling to write down their commercial real estate assets is having to take a hit to​ capital, and this provides replacement capital on​ very, very favorable terms. So it deals with the left side of the balance​ sheet..." a. Would a loan from the Treasury be counted as part of a​ bank's capital? No. A​ bank's capital excludes loans from government entities. ​Yes, a loan from the treasury would be counted as bank capital. ​Yes, any kind of loan is counted as bank capital. ​No, a loan from the treasury would not be counted as bank capital.

​No, a loan from the treasury would not be counted as bank capital.

The following entries​ (in millions of​ dollars) are from the balance sheet of Rivendell National Bank​ (RNB): U.S. Treasury bills-$20 Demand deposits-$46 ​Mortgage-backed securities-​$33 Loans from other banks-$9 ​C&I loans-$51 Discount loans-$10 NOW accounts-$40 Savings accounts-$15 Reserve deposits with Federal Reserve-$10 Cash items in the process of collection-$8 Municipal bonds-$6 Bank building-$3 Use the entries given above to construct the following balance sheet which is similar to the one displayed in the text.

​RNB's capital is what percentage of its​ assets? ​Capital/asset ratio=8.40% ​(Enter your answer rounded to two decimal places.​)

The most important bank liabilities are ​Small-denomination time deposits and Checkable deposits. Borrowings and​ Small-denomination time deposits. ​Large-denomination time deposits and Checkable deposits. Checkable deposits and Bank capital.

​Small-denomination time deposits and Checkable deposits.

In his​ memoirs, Herbert Hoover described the reaction of his Treasury Secretary to the Great​ Depression: First was the​ "leave it alone​ liquidationists" headed by Secretary of the Treasury​ Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one​ formula: "Liquidate​ labor, liquidate​ stocks, liquidate the​ farmers, liquidate real​ estate." Can these views help to explain the actions by the Fed during the early years of the Great​ Depression? ​No, these views​ don't help to explain the actions by the Fed. The Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy needed government intervention in order to recover. Yes. The Fed and the government did absolutely nothing to help the economy during the Great Depression. ​Yes, to an​ extent, because the Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy will​ self-adjust and any attempt to intervene will either do nothing or create negative consequences. There is not enough information to answer the question.

​Yes, to an​ extent, because the Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy will​ self-adjust and any attempt to intervene will either do nothing or create negative consequences.