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C. If a bank failed, then depositors would potentially lose all their money.
What did bank depositors have to fear in the early 1930s? A. Depositors had fear of a reduction of interest rates. B. Depositors had fear of the nationalization of commercial banks. C. If a bank failed, then depositors would potentially lose all their money. D. Depositors had fear of hyperinflation.
B. is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close.
A bank run A. occurs when the majority of commercial banks in the country withdraw their reserve funds from the central bank. B. is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close. C. involves a bank increasing its holdings of demand deposits. D. is a reduction of the interest below zero.
A. increased their 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 A. increased their capital. B. decreased excess reserves. C. increased the interest rate. D. decreased their debt.
D. an increasing money supply and falling interest rates.
n his history of the Federal Reserve, Allan Meltzer of Carnegie Mellon University describes the views of Federal Reserve officials in the fall of 1930: Most of the policymakers regarded the substantial decline in short-term market interest rates ... as the main ... indicators of the current position of the monetary system.... [Policy] was "easy" and had never been easier in the experience of the policymakers of the Federal Reserve System. Source: Alan H. Meltzer, A History of the Federal Reserve: Volume 1: 1913-1951, Chicago: University of Chicago Press, 2003, p. 315. What does it mean to say that Fed policy is "easy"? An "easy" Fed policy suggests A. a decreasing money supply and rising interest rates. B. an increasing money supply and rising interest rates. C. a decreasing money supply and falling interest rates. D. an increasing money supply and falling interest rates.
B. Traditional plans are "defined benefit plans" whereas 401(k) plans are "defined contribution plans."
An article in the New York Times observes that 401(k) plans: have largely supplanted traditional pensions and become the central pillar of America's employer-sponsored retirement system, with 60 million workers participating in them. Source: Steven Greenhouse, "Should the 401(k) Be Reformed or Replaced?" New York Times, September 11, 2012. What are "traditional pension plans," and how do they differ from 401(k) plans? A. Traditional plans grant employees ownership of the funds while 401(k) plans give employers ownership of the funds. B. Traditional plans are "defined benefit plans" whereas 401(k) plans are "defined contribution plans." C. Traditional plans yield a contingent dollar benefit payment while 401(k) plans promise employees a particular dollar benefit payment. D. All of the above. E. A and C only.
D. It signals that the firm's assets are less secure than anticipated.
Why would one money market fund having broken the buck cause a run on other money market funds? A. It signals an unexpected rise of deflation. B. It signals an unexpected rise of inflation. C. It signals that the role of government will increase, which will definitely lead to decrease in investors' profit. D. It signals that the firm's assets are less secure than anticipated.
C. A high net worth or high income individual.
A publication of the Securities and Exchange Commission (SEC) notes that to invest in a hedge fund: open double quoteYou generally must be an accredited investor.close double quote Source: Securities and Exchange Commission, Investor Bulletin: Hedge Funds. What is an accredited investor? A. An investor who has been accredited by the SEC. B. An investor who only buys accredited investments. C. A high net worth or high income individual. D. An investor who completes a financial literacy course.
A. Because FDIC insurance did not exist in the early 1930s, depositors today do not face similar fears.
Do depositors today face similar fears? A. Because FDIC insurance did not exist in the early 1930s, depositors today do not face similar fears. B. Because TARP insurance did not exist in the early 1930s, depositors today do not face similar fears. C. Depositors face the same fears now as in the early 1930s. D. It is impossible to compare problems depositors face now and those in the early 1930s.
No
Does a bank have to be insolvent to experience a run?
B. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is positive.
Former Federal Reserve Chair Ben Bernanke has observed that; open double quoteEven a bank that is solvent under normal conditions can rarely survive a sustained run.close double quote Source: Ben S. Bernanke, The Courage to Act: The Financial Crisis and Its Aftermath, New York: W.W. Norton, 2015, p. 45. What does Bernanke mean by "solvent under normal conditions"? A. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is negative. B. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is positive. C. The value of a bank's assets is less than the value of its liabilities, so its net worth, or capital, is negative. D. The value of a bank's assets is less than the value of its liabilities, so its net worth, or capital, is positive.
A. short term in the repo market, the refusal of lenders to renew their repos is akin to a commercial bank's depositors withdrawing funds.
How can an investment bank experience a "run"? Because investment banks borrow A. short term in the repo market, the refusal of lenders to renew their repos is akin to a commercial bank's depositors withdrawing funds. B. from the U.S. Treasury, a "run" can happen to an investment bank if the Treasury allows expenditures to exceed tax revenues. C. short term from commercial banks, they will experience a "run" whenever commercial banks do. D. long term from a variety of lenders, they cannot experience a "run."
C. the Fed's deflationary policies.
The depression continued well beyond June, 1930 because of A. the increase in wealth. B. the increase in international trade. C. the Fed's deflationary policies. D. bank success.
D. bank failures.
The depression continued well beyond June, 1930 because of A. the increase in wealth. B. the increase in international trade. C. the Fed's inflationary policies. D. bank failures.
increase, more
The publication also notes that hedge funds often use leverage and that: "The use of leverage can turn an otherwise conservative investment into an extremely risky investment." Leverage increases the risk of an investment because although borrowing may ______ the potential return of an investment, in a market downturn a company may owe ______ than the value of the underlying asset.
increasing bankruptcies and defaults increasing increased more
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 ______ the real interest rate and the real value of debts, which ______ the burden on borrowers and led to ______ loan defaults.
A. Low nominal interest rates would indicate to the Federal Reserve that it did not need to intervene in the banking system.
Why might Fed officials have believed that low nominal interest rates were a good indicator that policy was easy? A. Low nominal interest rates would indicate to the Federal Reserve that it did not need to intervene in the banking system. B. In the Fed's view comma low nominal interest rates indicated that there was not an adequate supply of excess reserves to beused for losses or loans. C. Both A and B are correct. D. None of the above is correct.
A. Hoover did not foresee the financial panic that would ensue for the next three years, and which would magnify the impact of the recession.
Why might Hoover have reasonably expected that it would have ended by June, 1930? A. Hoover did not foresee the financial panic that would ensue for the next three years, and which would magnify the impact of the recession. B. Hoover did not foresee that hyperinflation would occur and the unemployment rate would remain high. C. Hoover did not have any mathematical models (as we have today) that would have given him an accurate forecast. D. All of the above.
B. Underwriting is an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit.
A review of a biography of the British investment banker Siegmund Warburg states that Warburg believed: "Investment banking should not be about gambling but about ... financial intermediation built on client relationships, not speculative trading...Warburg was always queasy about profits made from [investing] the firm's own capital, preferring income from advisory and underwriting fees." Source: "Taking the Long View," Economist, July 24, 2010. What is underwriting? A. Underwriting is the first time a firm sells stock to the general public. B. Underwriting is an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit. C. Underwriting is the signing of contract for buying or selling debt. D. Underwriting is the creation of sophisticated financial instruments.
C. occurs when house prices move beyond their fundamental values.
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." Source: Sewell Chan, "Greenspan Concedes That the Fed Failed to Gauge the Bubble," New York Times, March 18, 2010. A house price bubble A. means that asset prices have increased beyond the point that could be justified by property appraisers. B. means that asset prices have decreased below the point that could be justified by fundamental evaluation. C. occurs when house prices move beyond their fundamental values. D. 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.
C. Yes, employees must now make informed decisions minus not an easy task.
Are there any reasons why 401(k) plans might be less desirable to employees? A. Yes, these plans invite government intrusion into the employer-employee relationship. B. No, employees are unambiguously better off with these plans. C. Yes, employees must now make informed decisions minus not an easy task. D. A and C are correct.
C. Yes, employers may no longer reap any excess of plan funds.
Are there any reasons why 401(k) plans might be less desirable to employers? A. Yes, these plans invite government intrusion into the employer-employee relationship. B. No, employers are unambiguously better off with these plans. C. Yes, employers may no longer reap any excess of plan funds. D. A and C are correct.
A. Yes. Some would argue that the Bank of United States was not as interconnected as Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular bank's failure.
Are there counterarguments to Rolnick's view? A. Yes. Some would argue that the Bank of United States was not as interconnected as Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular bank's failure. B. No. There are no counterarguments to this view.
A. one of the largest banks at the time, and it failed in December 1930, largely from falling real estate prices.
Arthur Rolnick of the Federal Reserve Bank of Minneapolis has argued that in their account of the failure of the Bank of United States: Friedman and Schwartz provide the rationale for the policy that today is known as "too big to fail"long dashthat there are some institutions that are so big that we can't afford to let them fail because of the systemic impact on the rest of the economy.... They suggest that if the Fed had rescued this bank, the Great Depression might only have been a short, albeit severe, recession. Source: Arthur J. Rolnick, "Interview with Ben S. Bernanke," Federal Reserve Bank of Minneapolis, The Region, June 2004. What was the Bank of United States, when did it fail, and why did it fail? The Bank of United States was A. one of the largest banks at the time, and it failed in December 1930, largely from falling real estate prices. B. labeled by Friedman/Schwartz as too big to fail, but it failed in October 1929 largely from falling T-bills. C. one of the largest banks at the time, and it failed in August 1929 largely from a real estate boom. D. labeled by Friedman/Schwartz as too big to fail, but it failed in October 1929 largely from mortgage defaults.
C. A and B are correct.
Financial journalist David Wessel has described what happened with the Reserve Primary Fund, a money market mutual fund, on September 16, 2008: At 4:15 P.M., the fund issued a press release. The Lehman paper in its portfolio was worthless and the fund's shares were worth not $1, but only 97 cents: breaking the buck. The news triggered a run that spread through the $3.4 trillion [money market mutual fund] industry. Source: David Wessel, In Fed We Trust, New York: Crown Business, 2009, p. 207. What is "Lehman paper"? A. Lehman Brothers debt. B. Lehman Brothers commercial paper. C. A and B are correct. D. Neither A, nor B is correct.
B. Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.
How does deposit insurance encourage banks to take on too much risk? A. Deposit insurance encourages banks to increase investments in riskless assets. B. Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses. C. With deposit insurance, depositors have more incentive to withdraw their deposits if the managers make reckless investments. D. Banks can make riskier investments because the government has insured banks against losses on their investments.
A. two months before the October 1929 stock market crash.
In June 1930, a delegation of businessmen appeared at the White House to urge President Herbert Hoover to propose an economic stimulus package. Hoover told them: "Gentlemen, you have come sixty days too late. The depression is over." Source: Arthur M. Schlesigner, Jr., The Crisis of the Old Order, Boston: Houghton-Mifflin, 1957, p. 331. The Great Depression began A. two months before the October 1929 stock market crash. B. in October 1929. C. two months after the October 1929 stock market crash. D. four months before the October 1929 stock market crash.
A. In the event of a nonbank financial institution run, there is no equivalent of the FDIC. B. 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 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. Source: Alan Greenspan, "The Crisis," April 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial system? (Check all that apply.) A. In the event of a nonbank financial institution run, there is no equivalent of the FDIC. B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow short and lend long. C. Nonbank financial institutions are required to maintain the equivalent of reserve requirements. D. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow long and lend short.
A. A bank run that is fueled by fear of bank failure.
In describing the bank panic that occurred in the fall of 1930, Milton Friedman and Anna Schwartz wrote: A contagion of fear spread among depositors, starting from the agricultural areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits. Source: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960, Princeton, NJ: Princeton University Press, 1963, p. 308. What do the authors mean by a "contagion of fear"? A. A bank run that is fueled by fear of bank failure. B. The fear of bad weather, which causes an increase in the prices of agricultural goods. C. The bankruptcy of depositors. D. A recession.
A. credit unions
In discussing the 2007-2009 financial crisis, Federal Reserve Vice Chair Stanley Fischer observed that: "The fact that losses in what was a relatively small part of the mortgage market quickly spread through the rest of the financial system illustrates how the complex interconnections among banks and nonbanks can amplify shocks in significant and unanticipated ways." Source: Stanley Fischer, "The Importance of the Nonbank Financial Sector," remarks at a conference on "Debt and Financial Stability--Regulatory Challenges" sponsored by the Bundesbank and the German Ministry of Finance, March 27, 2015. All of the following are considered "nonbanks," except: A. credit unions B. investment banks C. mutual funds D. hedge funds
D. The financing of investments by borrowing rather than using capital.
In referring to the collapse of the Long-Term Capital Management hedge fund in 1998, an article in the New York Times noted that: Starting with just $5 billion in capital, the fund was able to get $125 billion in additional funds. Using that leverage, it took on trading positions with an estimated potential value of $1.25 trillion. Despite the fund's seemingly brilliant strategy, the high leverage meant that it did not take much of a setback to wipe out the fund's underlying capital. And the potential freezing of $1 trillion of positions, even temporarily, was seen as a major risk to the system. Source: Anna Bernasek, "Hedge Funds" Heft Raises Increasing Concern About Their Risks," New York Times, July 5, 2005. What is leverage? A. The financing of investments by using capital rather than borrowing. B. The financing of investments by using equity rather than borrowing. C. The financing of investments by using financial assets. D. The financing of investments by borrowing rather than using capital.
B. No. Because of deflation, real rates were high.
In the context of the early 1930s, were low nominal interest rates a good indicator that policy was easy? A. Yes. Because of inflation, real rates were low. B. No. Because of deflation, real rates were high. C. Yes. Because of deflation, real rates were low. D. No. Because of inflation, real rates were high.
A. A recession that includes a financial crisis is generally more complex and has more severe consequences comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession.
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." Source: Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press, 2009, p. 248. Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial crisis? A. A recession that includes a financial crisis is generally more complex and has more severe consequences comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma further affecting real output. C. Both A and B are correct. D. 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. Underwriting is financial intermediation because the bank brings together savers and the issuers of securities.
In what sense is an investment bank that engages in underwriting acting as a financial intermediary? A. Underwriting is financial intermediation because the bank brings together savers and the issuers of securities. B. The statement is not correct and an investment bank that engages in underwriting does not act as a financial intermediary. C. Underwriting is financial intermediation because the bank creates the financial instruments. D. Underwriting is financial intermediation because the bank gains profit from the procedure.
A. They both borrow short and lend long.
In what ways are investment institutions similar to commercial banks? A. They both borrow short and lend long. B. They both provide monetary policies. C. They both offer traditional banking activities, such as taking deposits and making loans. D. They are completely different financial organizations.
C. Investment institutions are different from commercial banks because they do not engage in traditional commercial banking activities, such as taking deposits and making loans.
In what ways are they different? A. Commercial banks are different from investment institutions because they do not offer short-term assets to borrow short and thus are unable to lend long. B. Investment institutions are different from commercial banks because they do not research the financial markets as commercial banks do. C. Investment institutions are different from commercial banks because they do not engage in traditional commercial banking activities, such as taking deposits and making loans. D. There are no differences between investment institutions and commercial banks.
D. All of the above are correct.
In what ways does the shadow banking system differ from the commercial banking system? A. The shadow banking system, unlike the commercial banking system, does not offer traditional banking services such as taking in deposits. B. The commercial banking system, unlike the shadow banking system, is heavily regulated by the government. C. The shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks. D. All of the above are correct.
C. A and B are correct.
Is an investment bank that buys securities with its own capital acting as a financial intermediary? A. An investment bank that buys securities with its own capital is not acting as a financial intermediary. B. By buying securities with its own capital the bank expects to get profit from the yield or the changes in price. C. A and B are correct. D. Neither A, nor B is correct.
B. The government can insure deposits. D. A central bank can act as a lender of last resort.
What are the two methods that governments typically use to avoid bank panics? (Check all that apply.) A. The government can nationalize banks. B. The government can insure deposits. C. The government can increase the refinance rate. D. A central bank can act as a lender of last resort.
A. Bank panics may start in an isolated area, but the fear they engender quickly spreads to banks elsewhere.
What do the authors mean that "such contagion knows no geographical limits"? A. Bank panics may start in an isolated area, but the fear they engender quickly spreads to banks elsewhere. B. Bank panics always start in agricultural area banks, then spread to urban area banks. C. Bank panics produce a contagion that spreads from country to country. D. None of the above.
B. Simultaneous withdrawals by a bank's depositors result in the bank closing.
What does he mean by a "sustained run"? Why can't a bank survive a sustained run? A. Simultaneous devaluation of assets result in a bank closing. B. Simultaneous withdrawals by a bank's depositors result in the bank closing. C. The closing of other banks causes a bank to close. D. Simultaneous deposits result in a bank closing.
D. asset prices have increased beyond the point that could be justified by fundamental evaluation.
What does it mean to say that there is a bubble in the housing market? A bubble means that A. asset prices have increased beyond the point that could be justified by property appraisers. B. the decline in the housing market caused not only decreases in spending on residential construction, but also affected markets for furniture and appliances. C. asset prices have decreased below the point that could be justified by fundamental evaluation. D. asset prices have increased beyond the point that could be justified by fundamental evaluation.
B. Breaking the buck occurs when a money market mutual fund's share price falls below $1.00.
What does "breaking the buck" mean? A. Breaking the buck occurs when a money market mutual fund's share price falls below $0.50. B. Breaking the buck occurs when a money market mutual fund's share price falls below $1.00. C. Breaking the buck occurs when a money market mutual fund's share price falls below $1.50. D. Breaking the buck occurs when a money market mutual fund's share price falls below $0.98.
B. The failure of Lehman Brothers marked a turning point in the crisis. C. Many parts of the financial system became frozen, as trading in securitized loans largely stopped.
What effects did the run on Lehman Brothers have on the U.S. economy? (Check all that apply.) A. Large firms had difficulty arranging for even short-term loans, while small firms were able to escape this difficulty. B. The failure of Lehman Brothers marked a turning point in the crisis. C. Many parts of the financial system became frozen, as trading in securitized loans largely stopped. D. The failure of Lehman Brothers had no effect on the U.S. economy.
C. The article indicates that $5 billion in capital was leveraged to $125 billion.
What information from this excerpt indicates that Long-Term Capital Management was highly leveraged? A. The article indicates that $1.25 trillion in capital was leveraged to $1 trillion. B. The article indicates that $125 billion in capital was leveraged to $5 billion. C. The article indicates that $5 billion in capital was leveraged to $125 billion. D. The article indicates that $1.25 trillion in capital was leveraged to $5 billion.
B. A "run" is a rush to withdraw money before everyone else does.
What is a "run"? A. A "run" is a rush to invest money before everyone else does. B. A "run" is a rush to withdraw money before everyone else does. C. A "run" means that investors froze all current investing activities. D. A "run" has no special meaning in the context of mutual funds' performance.
A. A collection of nonbank financial institutions that channel money from savers to borrowers.
What is the shadow banking system? A. A collection of nonbank financial institutions that channel money from savers to borrowers. B. A part of the banking system, which is not regulated by law. C. An addition to the commercial banking system, created by the Fed after the financial crisis, in order to reduce banking instability. D. A small system of financial institutions that offer traditional banking services.
D. The potential freezing of $1 trillion of positions due to the fund's high leverage posed a systemic risk to the system.
What risks did it pose to the financial system? A. The financial system in most countries is regulated by the government, so no individual firm can disrupt the system's stability. B. The high leverage of a firm posed the risk of decreased equilibrium prices in the given market. C. The high leverage of a firm does not pose any risk to the financial system. D. The potential freezing of $1 trillion of positions due to the fund's high leverage posed a systemic risk to the system.
B. Leverage is a double-edged sword: it can increase profits, but it can also magnify losses.
What risks did Long-Term Capital Management's high leverage pose to the firm? A. High leverage increases the moral hazard problem to the firm. B. Leverage is a double-edged sword: it can increase profits, but it can also magnify losses. C. Leverage increases the interest-rate risk to the firm. D. High leverage does not pose any risk to the firm.
B. Bank panics exacerbated the effects of the Great Depression by reducing the ability for people to safely store their money comma which further reduced economic activity.
What role did the bank panics of the early 1930s play in explaining the severity of the Great Depression? A. Bank panics aggravated the effects of the Great Depression by making residential and commercial loans easier to get comma which further reduced economic activity. B. Bank panics exacerbated the effects of the Great Depression by reducing the ability for people to safely store their money comma which further reduced economic activity. C. Bank panics of the early 1930s did not play any role in explaining the severity of the Great Depression. D. Both A and B are correct.
B. Employees bear the risk of bad investments by the plan. C. Employers are no longer liable for plans being underfunded. D. Employers no longer promise to make a particular benefit payment.
Which of the following are reasons why 401(k) plans might be more desirable to employers than traditional pension plans? (Check all that apply.) A. Employers retain managerial control over the plans. B. Employees bear the risk of bad investments by the plan. C. Employers are no longer liable for plans being underfunded. D. Employers no longer promise to make a particular benefit payment.
A. The Fed failed to understand that with deflation, low nominal interest rates did not imply low real interest rates.
Which of the following is a reason that the Federal reserve failed to intervene to stabilize the banking system in the early 1930s? A. The Fed failed to understand that with deflation, low nominal interest rates did not imply low real interest rates. B. The Fed wanted to purge speculative excess, believing that it was necessary for the price level to rise and weak banks and weak firms to fail before a recovery could begin. C. Power within the Federal Reserve was much more unified than today comma making it more difficult for the Fed to act. D. The Fed was reluctant to rescue insolvent banks comma believing that doing so would discourage risky behavior by bank managers (the moral hazard problem).
C. Falling prices of mortgage-backed securities and other housing-related assets led to losses at banks and other intermediaries.
Which of the following is an example of the interconnections among banks and nonbanks he was referring to? A. Customers could transfer money through ACH from banks to nonbanks. B. Banks would purchase short-term commercial paper from non-banks. C. Falling prices of mortgage-backed securities and other housing-related assets led to losses at banks and other intermediaries. D. Banks made money off mortgage-backed securities they purchased as a steep discount.
D. All of the above.
Which of the following is true regarding the bursting of the housing bubble in the U.S. economy? A. Once housing prices started to fall, the banks that owned mortgaged-backed securities experienced losses. B. Once housing prices started to fall, homeowners realized their mistake and began defaulting on their mortgages. C. Many financial assets were based on the bet that housing prices would only increase. D. All of the above.
A. Friedman/Schwartz argue that the Bank of United States had so many deposits and was so interconnected to other banks that letting this bank fail caused a cascade of other bank failures.
Why might the Fed's failure to save the Bank of United States provide a rationale for the policy of "too big to fail"? A. Friedman/Schwartz argue that the Bank of United States had so many deposits and was so interconnected to other banks that letting this bank fail caused a cascade of other bank failures. B. According to Friedman/Schwartz, the Fed does not need to help huge banks if they have trouble because no one would be hurt from the failure. C. The Fed's failure to save the Bank of United States does not provide a rationale for the policy of "too big to fail" because the bankruptcy of the Bank of United States was the main cause of the Great Depression. D. The Fed's failure to save the Bank of United States has no connection to the policy of "too big to fail."
A. It signaled an unanticipated decline in value of a money market mutual fund's assets.
Why was it significant to the financial system? A. It signaled an unanticipated decline in value of a money market mutual fund's assets. B. It signaled an unanticipated increase of investors' interest to money market mutual funds. C. It signaled an unexpected rise of inflation. D. It signaled an unexpected rise of deflation.
C. Lehman brothers went bankrupt which substantially reduced the value of its commercial paper.
Why was the Lehman paper in the fund's portfolio worthless? A. The value of its commercial paper was underestimated before the financial crisis. B. Lehman brothers was bought by the Fed. C. Lehman brothers went bankrupt which substantially reduced the value of its commercial paper. D. A and C are correct.
C. 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.
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? A. Mortgage-backed securities are usually short-term loans. B. Buying a house is linked with short-term borrowings, which were insured by mortgage-backed securities. C. 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. D. All of the above.
C. The average holding of a house is 10 years.
Why would long-term interest rates have a closer connection to house prices than overnight interest rates? A. The Fed can control and change long-term interest rates more easily than short-term interest rates. B. Mortgage companies generally markup mortgages 8 - 10 % above the 10 - year Treasury bond yield. C. The average holding of a house is 10 years. D. Housing purchases are typically short-term investments.
