ECON 324 - Final Exam MC
An asset's interest rate risk ________ as the duration of the asset ________. A) decreases; decreases B) remains constant; increases C) increases; decreases D) decreases; increases
A
If you buy a put option on treasury futures at 110, and at expiration the market price is 115, the ________ will ________ exercised. A) call; be B) put; be C) call; not be D) put; not be
D
Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) doomsday approach. B) value-at-risk approach. C) stress-testing approach. D) trading-loss approach.
?
In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A) share draft account. B) stockman account. C) removed-repo account. D) sweep account.
?
Which of the following is not a benefit to an individual purchasing a mutual fund? A) free-riding B) reduced risk C) lower transactions costs D) diversification
?
10) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by A) a decline in the expected price level. B) a decrease in money growth. C) an increase in income. D) an increase in the expected price level.
A
Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. B) supporting the elimination of interest rate regulations, as this would reduce their cost of funds. C) opposing the elimination of interest rate regulations, as this would increase their cost of funds. D) demanding that interest rate regulations be imposed on money market mutual funds.
A
Economists believe that countries recently suffering hyperinflation have experienced A) reduced growth. B) reduced prices. C) lower interest rates. D) increased growth.
A
Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A) decrease; left B) increase; right C) decrease; right D) increase; left
A
Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) unanticipated increases in the price level. C) a rise in interest rates abroad. D) increased uncertainty from political shocks.
A
Having interest rate stability A) allows for less uncertainty about future planning. B) leads to demands to curtail the Fed's power. C) leads to problems in financial markets. D) guarantees full employment.
A
Hedging risk for a short position is accomplished by A) taking a long position. B) taking another short position. C) taking a neutral position. D) taking additional long and short positions in equal amounts.
A
High net worth helps to diminish the problem of moral hazard problem by A) making the debt contract incentive compatible. B) collateralizing the debt contract. C) giving the debt contract characteristics of equity contracts. D) requiring the state to verify the debt contract
A
If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A) of fluctuations in the demand for reserves. B) bond values will tend to remain stable. C) of fluctuations in the consumption function. D) of fluctuations in the business cycle.
A
In which of the following situations would you prefer to be the lender? A) The interest rate is 4 percent and the expected inflation rate is 1 percent. B) The interest rate is 25 percent and the expected inflation rate is 50 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 9 percent and the expected inflation rate is 7 percent.
A
Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations. A) demand; loosen B) demand: tighten C) supply; loosen D) supply; tighten
A
Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free Treasury bonds. This suggests that A) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. B) the benefit from the tax-exempt status of municipal bonds equals their default risk. C) Treasury bonds are not default-free. D) the benefit from the tax-exempt status of municipal bonds is less than their default risk.
A
Off-balance sheet activities involving guarantees of securities and back-up credit lines A) increase the risk a bank faces. B) have no impact on the risk a bank faces. C) slightly reduce the risk a bank faces. D) greatly reduce the risk a bank faces.
A
Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions, everything else held constant. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease
A
Severe fiscal imbalances can directly trigger a currency crisis since A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. B) the government may have to cut back on spending. C) the currency must surely increase in value. D) the government may stop printing money.
A
The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) debt deflation B) an improvement in banks' balance sheets C) increases in bond prices D) illiquidity
A
The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies. A) expansionary; a higher inflation rate; contractionary B) contractionary; a higher inflation rate; expansionary C) contractionary; higher unemployment; expansionary D) expansionary; higher unemployment; contractionary
A
The rate of inflation increases when A) the unemployment rate is less than the NAIRU. B) the unemployment rate increases faster than the NAIRU increases. C) the unemployment rate exceeds the NAIRU. D) the unemployment rate equals the NAIRU.
A
What makes the Federal Reserve so unique compared to other central banks around the world is its A) decentralized structure. B) centralized structure. C) regulatory functions. D) monetary policy functions.
A
Which of the following $1,000 face-value securities has the lowest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 15 percent coupon bond selling for $1,000 C) A 15 percent coupon bond selling for $900 D) A 10 percent coupon bond selling for $1,000
A
Which of the following accurately summarize the empirical evidence about technical analysis? A) Technical analysts fare no better than other financial analysis—on average they do not outperform the market. B) Technical analysts fare no better than other financial analysis, and like other financial analysts they outperform the market. C) Technical analysts fare no better than other financial analysis, and like other financial analysts they under-perform the market. D) Technical analysts tend to outperform other financial analysis, but on average they nevertheless under-perform the market.
A
Which of the following is not a reason financial regulation and supervision is difficult in real life? A) Financial institutions are not required to follow the rules. B) Financial institutions have strong incentives to avoid existing regulations. C) Regulated firms lobby politicians to lean on regulators to ease the rules. D) Unintended consequences may happen if details in the regulations are not precise.
A
A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. A) a decrease; a decrease; an increase B) an increase; an increase; a further increase C) a decrease; a decrease; a further decrease D) a decrease; an increase; an increase
B
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) increases economic activity. B) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. C) reduces uncertainty in the economy and increases market efficiency. D) allows for a more efficient use of funds.
B
Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into A) the nominal interest rate. B) the expected inflation rate. C) the nominal exchange rate. D) the real interest rate.
B
Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A) three; twelve B) five; twelve C) five; ten D) three; ten
B
Excessive volatility refers to the fact that A) stock price tend to rise in the month of January. B) stock prices fluctuate more than is justified by dividend fluctuations. C) stock returns display mean reversion. D) stock prices can be slow to react to new information.
B
If Second National Bank has more rate-sensitive liabilities then rate-sensitive assets, it can reduce interest rate risk with a swap that requires Second National to A) both receive and pay floating rate. B) pay fixed rate while receiving floating rate. C) both receive and pay fixed rate. D) receive fixed rate while paying floating rate.
B
If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) decrease; defensive; inject B) increase; defensive; inject C) increase; dynamic; inject D) decrease; dynamic; drain
B
If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________. A) rise; loose B) fall; loose C) rise; tight D) fall; tight
B
In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock. A) increase; expected sales B) increase; current C) decrease; expected sales D) decrease; current
B
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; raising B) increases; raising C) decreases; lowering D) increases; lowering
B
Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from other financial intermediaries. B) stocks. C) loans from banks. D) bonds and commercial paper.
B
One purpose of regulation of financial markets is to A) guarantee that the maximum rates of interest are paid on deposits. B) promote the provision of information to shareholders, depositors and the public. C) increase competition among financial institutions. D) limit the profits of financial institutions.
B
Supply-side economic policies seek to A) increase federal government expenditures. B) increase saving and investment using tax incentives. C) raise interest rates through contractionary monetary policy. D) increase consumption expenditures by increasing taxes.
B
The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A) regulators could not be fired, therefore, they didn't care if they did a good job or not. B) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. D) politicians listened to the taxpayers rather than the S&L lobbyists.
B
The directive of prompt corrective action means that A) there must be an immediate response to an increase in interest rates. B) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. C) bank failures cannot occur. D) the banks must take actions quickly to resolve reserve disputes.
B
The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to A) fall moderately in the near-term and rise later on. B) rise moderately in the near-term and fall later on. C) remain constant in the near-term and fall later on. D) remain unchanged in the near-term and rise later on.
B
The small-firm effect refers to the A) low returns after adjusting for risk earned by small firms. B) abnormally high returns earned by small firms. C) negative returns earned by small firms. D) returns equal to large firms earned by small firms.
B
The too-big-to-fail policy A) reduces moral hazard problems. B) treats large depositors of small banks inequitably when compared to depositors of large banks. C) puts large banks at a competitive disadvantage in attracting large deposits. D) allows small banks to take on more risk than large banks.
B
Three factors explain the risk structure of interest rates: A) maturity, default risk, and the liquidity of a security. B) liquidity, default risk, and the income tax treatment of a security. C) maturity, liquidity, and the income tax treatment of a security. D) maturity, default risk, and the income tax treatment of a security.
B
Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.
B
When compared to the Fed's ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles. A) nominal; inflation B) implicit; inflation C) nominal; monetary D) implicit; monetary
B
Which of the following functions is not performed by any of the twelve regional Federal Reserve Banks? A) Issuing new currency B) Setting interest rates payable on time deposits C) Check clearing D) Conducting economic research
B
Which of the following statements is false? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits include NOW accounts. D) Checkable deposits are payable on demand.
B
A key finding of the economic analysis of financial structure is that A) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. B) economists do not have a very good explanation for why securities markets are so heavily regulated. C) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. D) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets.
C
A possible sequence for the three stages of a financial crisis in an advanced economy might be ________ leads to ________ leads to ________. A) banking crises; increase in uncertainty; increase in interest rates B) banking crises; increase in interest rates; unanticipated decline in price level C) asset price declines; banking crises; unanticipated decline in price level D) unanticipated decline in price level; banking crises; increase in interest rates
C
A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________. A) more; rise B) fewer; rise C) more; fall D) fewer; fall
C
At its inception, the Federal Reserve was intended to be A) the issuer of government debt. B) the Treasury's banker. C) a lender-of-last-resort. D) a regulator of bank holding companies.
C
Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries. A) decrease; more B) increase; more C) increase; less D) decrease; less
C
Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet. A) Federal funds B) Eurodollars C) structured investment vehicles (SIVs) D) negotiable CDs
C
If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could ________ options on financial futures. A) buy call B) sell call C) buy put D) sell put
C
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases
C
If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________. A) loss; $4000 B) profit; $4000 C) profit; $3000 D) loss; $3000
C
In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was A) irrelevant. B) low. C) high. D) negative.
C
One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. B) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today. C) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today. D) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today.
C
Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time. A) negative; can B) positive; can C) zero; cannot D) positive; cannot
C
Rising interest-rate risk A) reduced the cost of financial innovation. B) increased the cost of financial innovation. C) increased the demand for financial innovation. D) reduced the demand for financial innovation.
C
The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds. A) lower; lower B) higher; higher C) higher; lower D) lower; higher
C
The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; temporarily B) increase; permanently C) decrease; temporarily D) decrease; permanently
C
The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) principal-agent; moral hazard B) free-rider; moral hazard C) free-rider; adverse selection D) principal-agent; adverse selection
C
The bond supply and demand framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A) government budget deficits; money B) government budget deficits; bonds C) expected inflation; money D) expected inflation; bonds
C
The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A) the corporate bond market B) the municipal bond market C) the commercial paper market D) the junk bond market
C
The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) Keynesian rate level of unemployment. B) frictional level of unemployment. C) natural rate level of unemployment. D) structural level of unemployment.
C
The interest rate on Treasury Inflation Protected Securities is a direct measure of A) the rate of deflation. B) the rate of inflation. C) the real interest rate. D) the nominal interest rate.
C
The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates on bonds with different maturities. C) the relationship among interest rates of different bonds with the same maturity. D) the relationship among the term to maturity of different bonds.
C
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; above B) greater; perpetuity; above C) greater; coupon; below D) less; perpetuity; below
C
When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation. A) larger; fast B) smaller; slow C) larger; slow D) smaller; fast
C
Which set of goals can, at times, conflict in the short run? A) Interest rate stability and financial market stability. B) Exchange rate stability and financial market stability. C) High employment and price level stability. D) High employment and economic growth.
C
With the creation of the Federal Deposit Insurance Corporation, A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. B) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors. C) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. D) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors.
C
________ and ________ may provide an explanation for stock market bubbles. A) Overconfidence; social isolationism B) Underconfidence; social isolationism C) Overconfidence; social contagion D) Underconfidence; social contagion
C
A nominal anchor promotes price stability by A) keeping economic growth low. B) outlawing inflation. C) stabilizing interest rates. D) keeping inflation expectations low.
D
A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. A) increase; decrease; decrease B) decrease; increase; increase C) decrease; decrease; decrease D) increase; increase; decrease
D
Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that A) they reduce the value of the debt contract. B) too many resources may be devoted to monitoring and enforcing them, as debt holders duplicate others' monitoring and enforcement efforts. C) they are inexpensive to monitor and enforce. D) borrowers may find loopholes that make the covenants ineffective.
D
Analysis of adverse selection indicates that financial intermediaries, especially banks, A) must buy securities from corporations to diversify the risk that results from holding non-tradable loans. B) despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. D) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.
D
Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) liability; liability B) asset; asset C) asset; liability D) liability; asset
D
Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) moral hazard; adverse selection B) diversification; moral hazard C) adverse selection; diversification D) adverse selection; moral hazard
D
Holding everything else constant, A) the lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A. B) if asset A's risk rises relative to that of alternative assets, the demand will increase for asset A. C) if wealth increases, demand for asset A increases and demand for alternative assets decreases. D) the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.
D
If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called A) double dealing. B) undermining. C) long marketing. D) short selling.
D
If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is A) between 5 and 10%. B) 10%. C) more than 10%. D) 5%.
D
If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement? A) One investment is as good as any other because the securities' prices are correct. B) Security prices can be used by managers to assess their cost of capital accurately. C) A security's price reflects all available information about the intrinsic value of the security. D) A stock that has done poorly in the past is more likely to do well in the future.
D
If one party pays a fixed fee on a regular basis in return for a contingent payment that is triggered by a downgrading of a firm's credit rating, that is called a A) credit option. B) credit swap. C) credit-linked note. D) credit default swap.
D
If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) two years. B) three years. C) four years. D) five years.
D
In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable. A) demand; demand; left B) demand; demand; right C) supply; supply; left D) supply; supply; right
D
In the Gordon growth model, a decrease in the required rate of return on equity A) reduces the future stock price. B) reduces the current stock price. C) increases the future stock price. D) increases the current stock price.
D
Parties who have sold a futures contract and thereby agreed to ________ (deliver) the bonds are said to have taken a ________ position. A) sell; long B) buy; short C) buy; long D) sell; short
D
Real interest rates are difficult to measure because A) they cannot be controlled by the Fed. B) data on them are not available in a timely manner. C) they fluctuate too often to be accurate. D) real interest rates depend on the hard-to-determine expected inflation rate.
D
Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________. A) sale; decrease B) purchase; decrease C) sale; increase D) purchase; increase
D
The problems of raising the level of the inflation target include A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B) it is more difficult to stabilize the inflation rate at a higher targeting level. C) the costs of higher inflation in terms of the distortions it produces in the economy are high. D) all of the above.
D
The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. A) unemployment rate B) interest rate C) foreign exchange rate D) inflation rate
D
Which of the following is not an advantage of inflation targeting? A) Inflation targeting does not rely on a stable money-inflation relationship. B) Inflation targeting reduces the effects of inflation shocks. C) There is simplicity and clarity of the target. D) There is an immediate signal on the achievement of the target.
D
Which of the following statements are true? A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets. B) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates. C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. D) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II.
D
Which of the following statements comparing the European System of Central Banks and the Federal Reserve System is TRUE? A) Just like the Federal Reserve System, monetary operations are centralized in the European System of Central Banks with the European Central Bank. B) The European Central Bank's involvement in supervision and regulation of financial institutions is comparable to the Board of Governors' involvement. C) The European Central Bank has similar power over the National Central Banks when compared to the level of power the Board of Governors has over the Federal Reserve Banks. D) The budgets of the Federal Reserve Banks are controlled by the Board of Governors, while the National Central Banks control their own budgets and the budget of the European Central Bank.
D
Lessons that economists and policy makers have learned from the recent global financial crisis include A) The zero lower bound on interest rates can be a serious problem. B) Price and output stability do not ensure financial stability. C) Developments in the financial sector have a far greater impact on economic activity than was earlier realized. D) The cost of cleaning up after a financial crisis is very high. E) All of the above.
E
The "Greenspan doctrine" - central banks should not try to prick bubbles - was based on which of the following arguments? A) Asset-price bubbles are nearly impossible to identify. B) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. C) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. D) Raising interest rates has often been found to cause a bubble to burst more severely. E) all of the above.
E
