Financial Crisis Questions
Indirect costs of financial crises include:
decrease in consumer spending and decrease in bank lending.
The 2007-2009 financial crisis began with:
defaults on subprime mortgages.
In the United States, a bank facing a liquidity crisis can approach the Federal Reserve and ask for a ____ loan.
discount
In an effort to boost aggregate expenditure between August 2007 and January 2008, the Federal Reserve ______ monetary policy, by ______ the federal funds rate target.
eased; decreasing
To restrict risk taking by banks, regulators:
enforce capital requirements.
To prevent a financial crisis in 2008, the Fed under Ben Bernanke pursued a series of unorthodox policies, for example, it:
expanded its role as lender of last resort, quickly reduced the federal funds rate, bailed out investment bank Bear Stearns.
To fight financial crises, central banks can use:
expansionary monetary policy, bailouts, liquidity provisions.
It can be said that ________ is(are) the cause of an asset bubble.
expectations
Assume the Fed keeps interest rates constant, then when an asset bubble bursts, aggregate expenditure ____ and output _____.
falls; falls
Assume the Fed follows a countercyclical monetary policy, then when an asset bubble bursts, aggregate expenditure ____, the Fed ____ interest rates, and output ____.
falls; reduces; remains constant
When the Fed prevents a financial institution from falling, it ____.
gives away government money, provides loans, purchases assets
When a central bank acts as lender of last resort, it ________, and there is no cost to the ________.
helps a solvent institution facing a liquidity crisis; central bank or taxpayers
The Dodd-Frank Act includes the following:
increased regulation, policies to prevent institutions from becoming too big to fail, rules to discourage excessive risk taking.
When the government gives away money to a financial institution in trouble to prevent its failure, it _____ the moral hazard problem, _____ the likelihood that financial institutions will take excessive risks in the future.
increases; increasing
All financial crises have elements of:
insolvency, asset price crash, declining liquidity
To prevent a liquidity crisis, a central bank can:
lend directly to households.
In its role as lender of last resort, the Fed has the authority to ____ to a(n) ______ facing a ____ crisis.
lend; investment bank; liquidity, lend; commercial bank; liquidity, give money; commercial bank; solvency
In the United States, the Federal Reserve responded to the liquidity crisis of 2007 by vigorously playing its role as:
lender of last resort.
During the financial crisis, many borrowers defaulted on their loans and put many institutions at risk of failure. Policymakers could prevent failure by:
lending to the institution and purchasing its stock.
Like insolvencies in general, ________ can spread from one financial institution to another, and these spillovers largely ________.
liquidity crises; are psychological
In 2007, fears that losses would push banks into insolvency caused a(n) ________, asbanks ________.
liquidity crisis; became reluctant to loan to each other
In August 2007, a _______ pushed the _____ above its target of 5.25 percent.
liquidity crisis; federal funds rate
In a recession, ________, which makes ________ more likely.
loan demand falls; bank panics
That Lehman Brothers' failure in 2008:
meant that any financial institution could fail.
The liquidity crisis of 2007:
meant that many banks had trouble raising funds.
Regulations aimed at restricting the size of financial institutions would require _____ stringent capital requirements for larger institutions, thereby making them less likely to fail and ____ their return on equity as they grow.
more; reducing
In 2006, defaults on subprime mortgages led to losses to ________ and ________.
mortgage lenders; holders of mortgage-backed securities
Banks lend to:
one another, small borrowers, and other financial institutions, including shadow banks.
Ideally, the purpose of a bailout is to:
prevent bank failures from multiplying.
Fed programs created in fall 2008 had the intention of:
pushing down interest rates on mortgages.
An asset-price crash can lead to a(n) ________, which then leads to further ________.
recession; declines in asset prices
When the central bank acts as a lender of last resort, it:
requires the borrower to put up collateral.
As a consequence of the "flight to safety" during the financial crisis of 2007-2009:
securitization fell dramatically.
To prevent financial crises, the central bank lowers the ________, which should________.
target interest rate; raise aggregate expenditure
When the government gives away money beyond required insurance payments to prevent the problems of an insolvent financial institution from spreading, the direct costs are ultimately borne by:
taxpayers
In the aftermath of the financial crisis of 2007-2009:
the U.S. economy fell into a liquidity trap.
When Bank One fails and it has borrowed from Bank-A:
the assets of Bank-A fall and Bank-A also risks insolvency.
Many consider ____ to be the key blow to the financial system in 2008.
the bankruptcy of Lehman Brothers
Which of the following events is considered the key blow to the U.S. financial system in the 2007-2009 financial crisis?
the bankruptcy of Lehman Brothers
The main costs of government giveaways are:
the direct cost of the loan and the indirect cost of increased moral hazard.
The financial crisis caused banking regulators to adjust their thinking because:
the government was forced to rescue nonbank financial institutions that didn't have insurance.
Losses to asset holders when asset prices fall during a financial crisis are considered _____ costs of financial crises.
trivial
Which of the following led to falling output during the Great Depression?
wealth decreases and household spending decreases
Which of the following led to falling output during the Great Depression?
wealth decreases and household spending decreases, money supply decreases, deflation
The longer-term indirect cost of a bank bailout is the:
worsening of moral hazard.
The doctrine of ________ states that large banks facing insolvency must be bailed out to save the financial system.
"too big to fail"
At its peak, unemployment hit ________ during the Great Depression.
25 percent
Which of the following statements about liquidity crises is true?
A bank run is a classical example of a liquidity crisis.
Which of the following best describes how an asset crash reduces output?
Asset crash →wealth ↓→consumption ↓→AE ↓→output ↓
Which of the following statements about asset-price bubbles is true?
Asset-price bubbles bursting results in a decrease in consumer confidence.
To prevent a financial crisis in 2008, the Fed under ________ pursued a series of unorthodox policies; for example, it ________.
Ben Bernanke; expanded its role as lender of last resort
The Wall Street Reform and Consumer Protection Act of 2010 is known as the:
Dodd-Frank Act.
The _____ was the centerpiece of the 2010 financial reforms; this institution will ___.
Financial Services Oversight Council; monitor the entire financial system
Which of the following best describes how bank insolvencies reduce output?
Insolvency →number of banks ↓→loans ↓→AE ↓→output ↓
In the period 1930-1933, President ________ put an end to bank panics with ________.
Kennedy; martial law
Asset-price crashes can undermine the real economy through a:
None of these answers are correct.
Liquidity crises and/or bank insolvencies can directly undermine the real economy through:
None of these answers are correct.
In September 2008, the U.S. government placed Fannie Mae and Freddie Mac into conservatorship. In practice, the _____ promised to cover Fannie and Freddie's losses with public funds.
U.S. Treasury
An investment bank may face ________ if ________.
a liquidity crisis; its creditors lose confidence
A "credit crunch" refers to:
a sharp decrease in bank lending.
An asset bubble bursts if there is:
a vicious cycle of panic
When Congress established the Federal Reserve in 1913, the Fed's main purpose was to:
act as a lender of last resort.
An asset price crash can be interpreted as:
an asset-price bubble in reverse.
A financial institution becomes insolvent when its:
assets fall below its liabilities, net worth becomes negative, capital becomes negative.
Which of the following was not a major Fed policy during the 2007-2009 financial crisis?
bailout of Lehman Brothers Investment Bank
When the central bank provides a ________, it essentially ________.
bailout; gives money to a bank
Policies that involve the use of government or central bank funds to prevent institutions from failing or to compensate individuals or firms that are hurt by failures are commonly referred to as:
bailouts.
When depositors lose confidence in a bank there is a(n) ________, and the bank faces a ________.
bank run; liquidity crisis
The discount rate is not very effective in solving a liquidity crisis because:
banks do not want to signal weakness by borrowing from the Fed.
Generally when there is a financial crisis, it:
becomes a downward vicious cycle, is made worse if it causes a recession, precipitates a decline in asset prices.
When asset prices fall sharply, the value of borrowers' _____ fall(s) and ________increase(s), potentially creating a(n) _____.
collateral; adverse selection; credit crunch
Bank bailouts make it more likely that financial institutions will:
continue to take on excessive risk, believe they will be rescued if they become insolvent, become too big to fail.
When Congress established the Federal Reserve in 1913, the main purpose was to:A) give more power to the Federal government.
create a lender of last resort for U.S. banks.
During the bank panic of 1930-1933, the ________ rose, pushing the ________ down.
currency deposit ratio; money multiplier, reserve deposit ratio; money multiplier, amount of reserves; money multiplier
In 2007-2008, the Fed deviated from the Taylor rule because as inflation rose over that period, the Fed:
cut the federal funds rate.