Chapter 14 Money and Banking

1. One reason that financial regulations restrict the assets that banks can own is to: a. combat the moral hazard that government safety nets provide. b. limit the growth rate of banks. c. prevent banks from being too profitable. d. keep banks from spending lavishly on perks for executives.

a. combat the moral hazard that government safety nets provide.

1. A long-standing goal of financial regulators has been to: a. prevent banks from growing too big and powerful. b. minimize the competition that banks face. c. encourage banks to grow as large as possible. d. discourage small rural banks.

a. prevent banks from growing too big and powerful.

1. Contagion is: a. the failure of one bank spreading to other banks through depositors withdrawing of funds. b. the phenomenon that if one bank loan defaults it will cause other bank loans to default. c. the rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve. d. the rapid inflation that results from the printing of money.

a. the failure of one bank spreading to other banks through depositors withdrawing of funds.

1. The government provides deposit insurance; this insurance protects: a. large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible. b. depositors for up to $250,000 should a bank fail. c. the deposits of banks in their Federal Reserve accounts. d. the deposits that people have, but only for federally chartered banks.

b. depositors for up to $250,000 should a bank fail.

1. The purpose of the government's safety net for banks is to do each of the following, except: a. protect the integrity of the financial system. b. eliminate all risk that investors face. c. stop bank panics. d. improve the efficiency of the economy.

b. eliminate all risk that investors face.

1. When healthy banks fail due to widespread bank panics, those who are likely to be hurt are: a. government regulators. b. households and small businesses. c. the FDIC. d. the Federal Reserve.

b. households and small businesses.

1. The government's too-big-to-fail policy applies to: a. certain highly populated states where a bank run impacts a large percent of the total population. b. large banks whose failure would start a widespread panic in the financial system. c. large corporate payroll accounts held by some banks where many people would lose their income. d. banks that have branches in more than two states.

b. large banks whose failure would start a widespread panic in the financial system.

1. An economic rationale for government protection of small investors is that: a. large investors can better afford losses. b. many small investors cannot adequately judge the soundness of their bank. c. there is inadequate competition to ensure a bank is operating efficiently. d. banks are often run by unethical managers who will often exploit small investors.

b. many small investors cannot adequately judge the soundness of their bank.

1. One lesson learned from the bank panics of the early 1930's is: a. the lender of last resort function almost guarantees that bank panics are a thing of the past. b. the mere existence of a lender of last resort will not keep the financial system from collapsing. c. only the U.S. Treasury can be a true lender of last resort. d. the financial system will collapse without a lender of last resort.

b. the mere existence of a lender of last resort will not keep the financial system from collapsing.

1. Financial regulators set capital requirements for banks. One characteristic about these requirements is: a. every bank will have to hold the same level. b. the riskier the asset holdings of a bank, the more capital it will be required to have. c. the more branches a bank has, the more capital it must have. d. the amount of capital required is inversely related to the amount of assets the bank owns.

b. the riskier the asset holdings of a bank, the more capital it will be required to have.

1. One of the unique problems that banks face is: a. they hold liquid assets to meet illiquid liabilities. b. they hold illiquid assets to meet liquid liabilities. c. they hold liquid assets to meet liquid liabilities. d. both their assets and their liabilities are illiquid.

b. they hold illiquid assets to meet liquid liabilities.

1. A bank run involves: a. illegal activities on the part of the bank's officers. b. a bank being forced into bankruptcy. c. a large number of depositors withdrawing their funds during a short time span. d. a bank's return on assets being below the acceptable level.

c. a large number of depositors withdrawing their funds during a short time span.

1. The financial system is inherently more unstable than most other industries due to the fact that: a. while in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified. b. banks deal in paper profits, not in real profits. c. a single firm failing in banking can bring down the entire system; this isn't true in most other industries. d. there is less competition than in other industries.

c. a single firm failing in banking can bring down the entire system; this isn't true in most other industries.

1. The financial crisis of 2007-2009 has made which of the following regulatory goals a top priority for government: a. disclosure of accounting information. b. minimum capital requirements. c. avoidance of systemic risk. d. promotion of competition.

c. avoidance of systemic risk.

1. Bank panics have often begun as a result of: a. rumors only. b. real economic events only. c. both rumors and real economic events. d. neither rumors nor economic events.

c. both rumors and real economic events

1. When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: a. taking over the lender of last resort function and assigning this function to the U.S. Treasury. b. ordering the printing of tens of billions of dollars of additional currency. c. creating the FDIC and offering deposit insurance. d. declaring a bank holiday and closing banks for 30 days.

c. creating the FDIC and offering deposit insurance.

1. Empirical evidence points to the fact that financial crises: a. are newsworthy but have no impact on economic growth. b. have a negative impact on economic growth only for the year of the crisis. c. have a negative impact on economic growth for years. can have a positive impact on economic growth as weak borrowers are weeded out

c. have a negative impact on economic growth for years.

1. Banking regulations prevent banks from: a. holding more than 10 percent of their assets in common stock of companies. b. owning corporate jets. c. owning common stocks of corporations. d. building big office buildings.

c. owning common stocks of corporations

1. Deposit insurance only seems to be viable at the federal level. This is likely due to the fact that: a. state funds are less informed about the solvency of national banks. b. a run on the banks within a state will always spread countrywide. c. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis. d. the cost of state insurance is prohibitively high.

c. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis.

1. The government's role of lender of last resort is directed to: a. large manufacturing firms that employ thousands of people. b. depositors; this is role the government plays when they insure depositors' balances in banks that fail. c. developing countries that are trying to build their financial systems. d. banks that experience sudden deposit outflows.

d. banks that experience sudden deposit outflows.

1. Banks can effectively choose their regulators by deciding whether to: a. be a private or public corporation. b. be a member of the Federal Reserve or not. c. purchase FDIC insurance or to forego the coverage. d. be chartered at the national or state level.

d. be chartered at the national or state level

1. The first test of the Federal Reserve as lender of last resort occurred with the: a. attack on Pearl Harbor by the Japanese. b. widespread failures of Savings and Loans in the 1980's. c. introduction of flexible exchange rates in the U.S. in 1971. d. stock market crash in 1929.

d. stock market crash in 1929.