Money and Banking Quiz 3- Nuchereno

Which of the following most accurately characterizes the Great Depression?

A. The Great Depression was a global financial and economic crisis, marked by high unemployment and an enormous contraction in the economy, which lasted until the advent of World War II.

Some argue that the Fed kept interest rates too low during the early 2000s, which was an important cause of the housing bubble. What evidence does Chairman Bernanke offer that contradicts that argument?

A. The United Kingdom had a housing boom during the same period, despite having tighter monetary policy than the United States.

The Fed acts as lender of last resort to banks as part of its regular activities. Which of the following best describes how the Fed's lending practices during the financial crisis were unusual?

A. The types of institutions to which the Fed made loans made the Fed's lending practices unusual.

The orderly liquidation authority allows the Federal Deposit Insurance Corporation (FDIC) to do what?

A. To close failing systemic firms in a way that causes less damage to the financial system

What ability does the Financial Stability Oversight Council (FSOC) have?

A. To designate systemically important nonbank institutions to be supervised by the Fed

Chairman Bernanke distinguishes between "triggers" and "vulnerabilities" when analyzing the source of the financial crisis. Which of the following statements best describes this distinction?

A. Triggers, such as mortgage losses, were elements that had a direct causal role in the financial crisis. Vulnerabilities were conditions in the economy and financial system that amplified the effects of those triggers.

Which of the following is one of the ways in which the Dodd-Frank Act subjects systemically important financial institutions to tougher supervision and regulation?

B. Bank affiliates are prohibited from trading on their own account.

Why would the Fed choose to reduce the federal funds rate nearly to zero in an effort to support the recovery?

B. Because longer-term rates tend to fall when the Fed reduces the short-term rate, and lower longer-term rates encourage spending and investment.

How did Fannie Mae and Freddie Mac introduce vulnerabilities into the financial system?

B. Both organizations were permitted to operate with inadequate capital to back their guarantees. This increased financial instability in the system.

The mission of a central bank includes promoting financial stability. Select the option below that best describes "financial stability."

B. Financial stability refers to the proper functioning of the financial system. To achieve this, central banks try to prevent or mitigate panics in a country's financial institutions.

How did the crisis affect central bank practice?

B. It underscored that maintaining financial stability is a responsibility as critical as monetary policy.

Which of the following best describes monetary policy in normal times?

B. Monetary policy involves the adjustment of short-term interest rates to promote macroeconomic stability.

Which of the following most accurately describes Chairman Bernanke's view of the Fed's economic policy response to the Great Depression?

B. The Fed maintained a tight economic policy, keeping real interest rates high, and also limited its extension of credit to troubled banks.

What is the primary reason that concerns about mortgage-backed securities led to a financial panic?

B. The complexity of the securities and poor risk monitoring meant that no one knew for sure who would bear the brunt of the losses as mortgages went into default. This caused a panic.

While the Fed's discount window is routinely used to provide overnight loans to banks, which of the following describes the unusual use of the discount window during the financial crisis, to reduce financial panic?

B. To encourage broad participation by financial firms, the Fed conducted auctions of discount window funds, in which financial firms could bid on how much they would pay to borrow these funds.

Why did the Fed undertake large-scale purchases of Treasury and government sponsored enterprise (GSE) mortgage-related securities?

B. To exert further downward pressure directly on longer-term rates

What measures did the Federal Reserve take to support critical institutions, such as Bear Stearns and AIG?

A. The Fed provided collateralized loans and facilitated the acquisition by another institution of Bear Stearns.

What were some structural factors in the housing market that prevented a quick recovery?

A. An overhang of unsold homes and falling house prices

What did Walter Bagehot believe was the best way for a central bank to respond to a financial panic?

A. Central banks should lend freely against good assets, but at a penalty interest rate to discourage excessive use of the central bank as lender of last resort.

Conventional monetary policy is a tool used by the Fed to stabilize the economy and promote economic recovery. Which of the following options best describes conventional monetary policy?

A. Conventional monetary policy involves management of the target short-term interest rate, or federal funds rate.

During the Great Depression, why could one nation's monetary policy have such a significant impact on the economies of other nations?

A. Countries on the gold standard were forced to maintain fixed exchange rates. So, the policy errors of one central bank were transmitted to the other nations on the gold standard.

Chairman Bernanke suggests that during the housing bubble of the early 2000s, there was an overall deterioration in mortgage quality. What does this mean?

A. Lenders were offering mortgages to large numbers of nonprime borrowers, often with little or no down payment and little or no documentation to demonstrate the borrower's creditworthiness

The mission of a central bank includes promoting macroeconomic stability. Select the option below that best describes "macroeconomic stability."

A. Macroeconomic stability is characterized by low and stable inflation with stable growth in output and employment.

How did falling house prices contribute to the increase in mortgage defaults?

A. Many homeowners needed to refinance in order to continue to afford their homes. But falling house prices prevented refinancing.

How did declining house prices affect the economic recovery?

A. Sharp declines in house prices reduced household wealth and thus made consumers less likely to spend.

Which of the following is a way in which the central bank promotes clear communication about monetary policy?

A. The Chairman began holding news conferences in 2011 to provide further explanation of monetary policy decisions.

Which of the following best describes the provision of liquidity tool of central banks?

C. A central bank provides short-term loans to financial institutions or markets, which can help calm financial panics.

How did the failure of Lehman Brothers affect money market funds (MMFs)?

C. An MMF that held commercial paper issued by Lehman failed to maintain a $1 share price, which led to a loss of confidence in, and a run on, MMFs more broadly.

The financial and sovereign debt crisis in Europe affected the United States in what way?

C. By leading to increased risk aversion and volatility in financial markets

Which of the following does Chairman Bernanke discuss as a primary cause of the housing bubble?

C. Chairman Bernanke argues that soaring house prices and the deterioration of lending standards caused the housing bubble.

In October 2008, the G-7 countries agreed to work together to stabilize the global financial system through a number of measures, including preventing the failure of systemically important financial institutions and ensuring that financial institutions had access to capital and funding. According to Chairman Bernanke, how do we know these measures were successful?

C. Interbank lending rates, which had spiked in October 2008, fell dramatically after the G-7 agreement was announced, indicating increased confidence in the financial system.

According to Chairman Bernanke, how did the liquidationist perspective exacerbate the Great Depression?

C. Liquidationism supported the Fed's economic policy of inaction, which led to rampant bank failures and unchecked economic decline.

What is the goal of a central bank when it raises short-term interest rates?

C. Raising interest rates can slow an economy that is growing at an unsustainable pace, which can cause a high rate of inflation.

How did purchasing Treasury and GSE mortgage-related securities stimulate the economy?

C. Reducing the supply of securities available to the market resulted in downward pressure on longer-term interest rates, which helped stimulate the economy.

What is one way in which a tight credit market affected the economic recovery?

C. Small businesses have difficulty getting credit, which affects job creation.

Which of the following provides the most accurate summary of the causes of the Great Depression?

C. The Great Depression had a number of causes, including the structure of the international gold standard, a bubble in stock prices, financial panics, and the economic and financial repercussions of World War I.

Which of the following is a primary cause of the reduction in the number of bank failures after 1933?

C. The Roosevelt Administration and the Congress created deposit insurance, which insured bank depositors against losses if a bank failed.

Which of the following best describes the process of securitization of mortgages?

C. This is the process of purchasing mortgages and bundling them for resale as mortgage-backed securities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instituted wide-ranging reforms of financial regulation in the United States. What was one reason for these reforms?

C. To create a systemic approach to regulating the financial system as a whole