ECON 2120 - Chapter 9

Which statement is TRUE? a) Once assets are securitized, the revenue streams from them cannot be divided up or sold in a variety of ways. b) The buyer of a securitized asset gets up-front cash while the seller gets the right to a stream of future payments. c) A mortgage loan that has been "securitized" is one that has been bundled together and sold on the market as different financial assets. d) A leverage ratio of 9 implies a buyer with $90,000 in cash can borrow $900,000.

A mortgage loan that has been "securitized" is one that has been bundled together and sold on the market as different financial assets.

Which statement is TRUE? a) The 2007-2008 crisis was brought about by low leverage and rising asset prices that created a panic in the shadow banking system and hence sharply reduced the amount of lending in the economy. b) A fire sale occurs when an investment bank goes on a buying spree and buys assets quickly. c) The shadow banking system includes investment banks. d) The deposits of commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $200,000.

The shadow banking system includes investment banks.

Which statement is TRUE? a) The rate of return on a zero-coupon bond currently selling for $850 that will pay $900 one year from now is 5.5 percent. b) A(n) IPO is the first time a corporation sells bonds to the public in order to raise capital. c) When interest rates rise, bond prices fall. d) One of the advantages of stock financing is that large sums of money can be raised and then paid back over a long time.

When interest rates rise, bond prices fall.

Which event would cause the equilibrium interest rate in the market for loanable funds to decrease? a) a leftward shift in the demand for loanable funds b) an upward shift in the demand for loanable funds c) an upward shift in the supply of loanable funds d) a leftward shift in the supply of loanable funds

a leftward shift in the demand for loanable funds

Which factor is NOT one of the four major factors that economists believe determine the supply of savings? a) interest rates b) marketing and psychological factors c) impatience d) arbitrage

arbitrage

According to the life cycle theory of savings, people tend to: a) borrow during prime working years. b) save during retirement. c) dissave during prime working years. d) borrow when young.

borrow when young

The decrease in private consumption and investment that occurs when government borrows more is called: a) crowding out. b) intertemporal substitution. c) consumption smoothing. d) collateral.

crowding out.

Which condition would NOT lead financial intermediation to fail? a) bank failures and panics b) controls on interest rates c) politicized lending d) extensive property rights

extensive property rights

Which timeline puts the events leading to the financial crisis of 2007-2008 in proper chronological order? a) reduction in the amount of lending in the economy, falling asset prices, high leverage in the shadow banking system b) reduction in the amount of lending in the economy, high leverage in the shadow banking system, falling asset prices c) rising asset prices, reductions in leverage in the shadow banking system, reduction in the amount of lending in the economy d) high leverage in the shadow banking system, falling asset prices, reduction in the amount of lending in the economy

high leverage in the shadow banking system, falling asset prices, reduction in the amount of lending in the economy

If a firm's liabilities exceed its assets, the firm is: a) securitized. b) leveraged. c) insolvent. d) collateralized.

insolvent

All else equal, higher _____ rates usually result in _____ savings. a) inflation; more b) interest; less c) time preference; more d) interest; more

interest; more

The higher the _____ rate, the _____ the quantity of funds demanded for investment. a) interest; greater b) exchange; greater c) exchange; smaller d) interest; smaller

interest; smaller

All else equal, if consumers decide to save less, the: a) demand curve in the market for loanable funds will shift to the right. b) demand curve in the market for loanable funds will shift to the left. c) supply curve in the market for loanable funds will shift to the left. d) supply curve in the market for loanable funds will shift to the right.

supply curve in the market for loanable funds will shift to the left.

All else equal, if consumers decide to save more, the: a) demand curve in the market for loanable funds will shift to the left. b) demand curve in the market for loanable funds will shift to the right. c) supply curve in the market for loanable funds will shift to the left. d) supply curve in the market for loanable funds will shift to the right.

supply curve in the market for loanable funds will shift to the right.

In order to counteract the decrease in investment demand during a recession, the government sometimes offers a: a) temporary investment tax credit. b) permanent investment tax credit. c) temporary savings tax credit. d) permanent savings tax credit.

temporary investment tax credit.

Which event would cause the supply curve to shift leftward and the equilibrium interest rate in the market for loanable funds to increase? a) an increase in the amount of the population working full time b) the application of an investment tax credit c) the time preference of the population increases d) a decline in business confidence in the economy

the time preference of the population increases

Suppose a business expands by acquiring new machines and equipment to reach higher production levels. Economists define this activity as: a) arbitrage. b) investment. c) saving. d) wealth.

investment

When General Motors decides to purchase a new assembly line in order to produce a new line of cars, this activity can be BEST categorized as: a) consumption. b) borrowing. c) investment. d) saving.

investment

In today's economy, if the people with the best ideas are not also the people with the most savings: a) they will have to borrow funds to bring their ideas to fruition. b) they will have to save and wait to bring their ideas to fruition. c) the economy will grow faster because money will go to established firms. d) the government has an obligation to fund the development of the ideas.

they will have to borrow funds to bring their ideas to fruition.

It has been said that consumers often want immediate satisfaction and therefore must be compensated for saving their money. Which preference best captures this phenomenon? a) risk preference b) inflation preference c) time preference d) liquidity preference

time preference

Which statement is TRUE? a) The shadow banking system includes only investment banks. b) If investors begin to doubt the solvency of an investment bank, it may lead the long-term loans to disappear more quickly because they are rolled over on a less frequent basis. c) In a commercial bank the money comes from depositors, while in an investment bank, the money comes from investors. d) The investments of investment banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

In a commercial bank the money comes from depositors, while in an investment bank, the money comes from investors.

Which statement is TRUE? a) A fire sale occurs when an investment bank goes on a buying spree and buys assets quickly. b) The 2007-2008 crisis was brought about by low leverage and rising asset prices that created a panic in the shadow banking system and hence sharply reduced the amount of lending in the economy. c) The deposits of commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. d) The shadow banking system includes only investment banks.

The deposits of commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

Treasury securities are particularly desirable for investors because: a) the U.S. government is unlikely to fail to make a payment. b) they are easy to sell despite being difficult to buy. c) they offer higher rates of return than do stocks on average. d) of their high default rate.

the U.S. government is unlikely to fail to make a payment.

An investment tax credit offered during a recession is most likely to be temporary so that: a) it does not disrupt the supply of savings. b) government revenues are not reduced. c) it is more easily funded through spending cuts. d) firms have an incentive to invest quickly.

firms have an incentive to invest quickly.

All else equal, if consumers decide to borrow less, the: a) demand curve in the market for loanable funds will shift to the right. b) demand curve in the market for loanable funds will shift to the left. c) supply curve in the market for loanable funds will shift to the left. d) supply curve in the market for loanable funds will shift to the right.

demand curve in the market for loanable funds will shift to the left.

Which statement is TRUE? a) A bond is something of value that by agreement becomes the property of the lender if the borrower defaults. b) A bond is a sophisticated IOU that documents who owes how much and when payment must be made. c) Banks, bond markets, and goods markets are all examples of financial intermediaries. d) Financial intermediaries raise the costs of moving savings from savers to borrowers and investors.

A bond is a sophisticated IOU that documents who owes how much and when payment must be made.