ECON 2035 Chapter 12
Banks have a maturity mismatch since A) they borrow long term, but lend short term. B) they borrow short term, but lend long term. C) some of their loans are short term while others are long term. D) some of their borrowings are short term while others are long term.
B
ATS accounts A) convert a corporation's checking account balance at the end of the day into an overnight repurchase agreement. B) are the names given to NOW accounts outside of New England. C) are negotiable certificates of deposit of less than $100,000. D) were used during the Great Depression by depositors who had lost faith in conventional checking accounts.
A
According to research by Reinhart and Rogoff, recessions that involve financial crises have typically been ________ than recessions that do not involve financial crises. A) longer and deeper B) longer but milder C) shorter but deeper D) shorter and milder
A
All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-2009 EXCEPT A) purchasing of most toxic assets such as mortgage-backed securities. B) reducing the federal funds rate to near zero. C) insuring deposits in money market mutual funds. D) effective nationalization of Fannie Mae and Freddie Mac.
A
Banks face liquidity risk because A) they can have difficulty meeting their depositor's demands to withdraw money. B) they are unable to borrow from the Federal Reserve. C) households and businesses may seek to borrow a large amount of funds in a short period of time. D) governments tend to run high budget deficits.
A
Congress created the Federal Reserve System A) to serve as a lender of last resort. B) to process the receipt of taxes received by the Internal Revenue Service. C) to regulate the value of the U.S. dollar against foreign currencies. D) to provide a source of mortgage loans to the residential housing market.
A
During the early 1930s, the Fed was reluctant to rescue nonsolvent banks out of fear of encouraging A) moral hazard. B) adverse selection. C) bank run. D) sovereign debt crisis.
A
In October 2008, the Fed cut its target for the federal funds rate to A) less than 1%. B) 1.75% C) 2.25%. D) 2.75%.
A
Losses in which holding resulted in BNP Paribas not allowing investors to redeem shares from three of its investment funds? A) mortgage-backed securities B) Lehman Brothers C) Bear Stearns D) real estate investment trusts
A
NOW accounts were developed in order to A) circumvent Regulation Q. B) provide banks with a checkable deposit on which they did not have to pay interest. C) provide banks with a liquid, interest-earning asset. D) provide banks with a means of earning interest on the funds in their reserve accounts with the Fed.
A
Regulation Q was intended to A) maintain banks' profitability by limiting competition for funds. B) increase the reserves banks would hold against demand deposits. C) increase the reserves banks would hold against time deposits. D) eliminate the need for discount loans.
A
The creation of a lender of last resort in the United States A) occurred in response to banking panics. B) was mandated in the U.S. Constitution. C) occurred in response to the S&L crisis of the 1980s. D) has been recommended by the Treasury in its report of late 1992.
A
The first stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.
A
The primary motive for financial innovation during the regulatory process is A) profit. B) adherence to the new regulations. C) return to the way business was conducted prior to the new regulations. D) increase coordination with other financial institutions.
A
The recession that became the Great Depression began A) two months prior to the stock market crash of 1929. B) with the stock market crash of 1929. C) one year after the stock market crash of 1929. D) with the banking panics of the early 1930s.
A
What does it mean for a money market mutual fund to "break the buck"? A) The value of its share declines below $1. B) It incurs losses on its investments. C) It increases its fees to more than 1% of net asset value. D) It is unable to meet the demand for withdrawals by investors.
A
Which of the following occurred following the failure of the Bank of the United States in 1930? A) Interest rates on low-grade corporate bonds rose relative to high-rated corporate bonds. B) Other banks in New York City suffered liquidity problems. C) A bank panic ensued within days. D) The stock market crashed.
A
Why might a nation seek to maintain a pegged exchange rate? A) It makes business planning easier for firms involved in the global economy. B) It removes the need to intervene in the foreign exchange market. C) It ensures that the exchange rate will remain at its equilibrium. D) It makes their currency more attractive on the foreign exchange market.
A
Why was the Fed reluctant to rescue insolvent banks? A) It thought it may lead to moral hazard. B) It thought it may lead to adverse selection. C) It thought they were still liquid. D) It did not think they were insolvent.
A
With respect to Lehman Brothers, Fed chair Ben Bernanke argued that A) because Lehman Brothers was insolvent, the Federal Reserve Act barred the Fed from saving the company. B) even though Lehman Brothers was not considered insolvent, the Federal Reserve Act barred the Fed from saving the company. C) because Lehman Brothers was not considered insolvent, the Federal Reserve Act required the Fed to save the company from bankruptcy. D) because Lehman Brothers was insolvent, the Federal Reserve Act required the Fed to save the company from bankruptcy.
A
Banks with which type of loans were most likely to fail during the early 1930s? A) mortgage loans B) agricultural loans C) commercial real estate loans D) international loans
B
By the summer of 2008, about what percent of subprime mortgages were overdue by at least 30 days? A) 10% B) 25% C) 34% D) 50%
B
Negotiable certificates of deposit were developed in order to A) compete for loan business that had been going to the commercial paper market. B) circumvent interest rate regulations on deposits. C) increase assets that were acceptable as collateral for discount loans. D) circumvent reserve requirements.
B
Regulation Q A) prohibited interstate banking. B) placed ceilings on allowable interest rates on time and savings deposits. C) required all banks to hold reserves against demand deposits. D) broadened the basis on which the Fed could make discount loans.
B
Sovereign debt refers to A) debt owned by the government. B) bonds issued by the government. C) debt owed to the government. D) debt only issued by nations with kings or queens.
B
The original intention of the Fed's role as lender of last resort was to make loans to banks that were A) not illiquid nor insolvent. B) illiquid, but not insolvent. C) insolvent, but not illiquid. D) both illiquid and insolvent.
B
The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a A) contagion. B) bank run. C) financial crisis. D) bank panic.
B
The recession of 2007-2009 was A) most severe recession ever experienced in the United States. B) the first recession since the 1930s to be accompanied by a financial crisis. C) caused by a stock market crash. D) limited to the economy of the United States.
B
The second stage in the regulatory process is A) a crisis. B) regulation. C) response by the financial system. D) regulatory response.
B
The situation where the price of an asset rises well above its fundamental value is called A) contagion. B) a bubble. C) a panic. D) disintermediation.
B
The third stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.
B
What is meant by senior debt? A) debt that has been around for the longest period of time B) debt that must be paid before junior debt is paid C) debt owed to the federal government D) debt issued by the federal government as opposed to states or corporations
B
When prices of new houses rise significantly faster than rent prices, this is evidence of a A) debt-deflation process. B) bubble. C) financial crisis. D) sovereign debt crisis.
B
Which of the following is NOT an accurate description of the recession that accompanied the financial crisis of 2007-2009? A) GDP declined by more than twice the rate of the average recession. B) Inflation rose at nearly twice the rate as the average recession. C) It lasted just under twice as long as the typical recession. D) Peak unemployment was about one-third higher than usual.
B
In September 2008, the Fed and the U.S. Treasury A) saved both Lehman Brothers and AIG from bankruptcy. B) saved Lehman Brothers, but not AIG, from bankruptcy. C) saved AIG, but not Lehman Brothers, from bankruptcy. D) saved neither Lehman Brothers nor AIG from bankruptcy.
C
Many economists believe A) the Fed could have reduced the severity of the Great Depression by raising interest rates. B) the Fed could have reduced the severity of the Great Depression by encouraging banks to make fewer loans to insolvent businesses. C) bank failures increased the severity of the Great Depression. D) the severity of the Great Depression and the policies of the Fed were unrelated.
C
The Franklin National Bank Crisis had its greatest impact on the market for A) commercial paper. B) commodity futures. C) negotiable certificates of deposit. D) Eurodollars.
C
The usual response of the banking system to new government regulations is A) evasion through whatever means are necessary. B) strict compliance. C) an attempt to circumvent the regulations through financial innovation. D) bankruptcy.
C
What happened to consumer prices as measured by the CPI between 1929 and 1933? A) rose by more than 20% B) didn't change C) declined by about 25% D) declined by about 80%
C
What was the purpose of the stress test administered by the Treasury in 2009? A) Evaluate potential losses of Fannie Mae and Freddie Mac. B) Assess the viability of AIG. C) Gauge how well the largest financial firms would fare if the recession deepened. D) Evaluate the solvency of the major investment banks.
C
When did Regulation Q finally disappear? A) 1934 B) 1945 C) 1986 D) 2000
C
Which investment bank avoided bankruptcy by being purchased by JP Morgan Chase in March 2008? A) Morgan Stanley B) Lehman Brothers C) Bear Stearns D) Merrill Lynch
C
A stress test of banks, such as that undertaken in the Spring of 2009, is designed to A) ensure that banks have followed proper accounting standards. B) make sure that banks are properly managed. C) gauge how well banks would fare if the economy worsens. D) estimate the impact of a bank panic on the overall economy.
C
As a part of the Dodd-Frank Act of 2010, Congress amended a portion of the Federal Reserve Act so the Fed could A) now make loans to individual companies. B) only make loans to commercial banks. C) no longer make loans to individual companies. D) no longer make any loans to private corporations.
C
As of 2016, what portion of bank assets were owned by the five largest bank holding companies? A) less than 10% B) approximately 25% C) more than 50% D) almost 80%
C
By how much did real GDP decline between 1929 and 1933? A) 18% B) 20% C) 27% D) 81%
C
Disintermediation refers to the A) failure of financial intermediaries due to moral hazard problems. B) failure of financial intermediaries due to adverse selection problems. C) movement of savers and borrowers from banks to financial markets. D) removal of government regulations of financial intermediaries.
C
During the Great Depression, unemployment peaked at A) 10%. B) between 15 and 20%. C) over 20%. D) 81%.
C
Which of the following banned most proprietary trading by commercial banks? A) Consumer Financial Protection Bureau B) Regulation Q C) Greenspan Rule D) Volcker Rule
D
Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s? A) the Fed's decision not to make loans to insolvent banks B) the large number of small, poorly diversified banks C) the large number of rural banks that held agricultural loans during a time of falling commodity prices D) the large amount of fraud carried out by bank managers
D
Which of the following is NOT true of an insolvent bank? A) Its net worth is negative. B) It may be unable to pay off its depositors. C) The value of its assets is less than the value of its liabilities. D) It must have no more deposits.
D
Who was effectively in charge of the Fed during the early 1930s? A) Secretary of Treasury B) Head of the Federal Reserve Bank of New York C) Comptroller of the Currency D) no one
D
A bank panic occurs when A) a bank is worried that its loans will not be repaid. B) an individual bank cannot meet its reserve requirements. C) a bank lacks sufficient funds with which to make loans. D) many banks experience a bank run simultaneously.
D
By how much did real investment decline between 1929 and 1933? A) 18% B) 20% C) 27% D) 81%
D
If banks were required to hold 100% reserves, this would A) put banks out of business. B) put depositors at greater risk of losing their money. C) prevent banks from making risky loans. D) eliminate bank runs.
D
In 1971, money market mutual funds were introduced as an alternative to A) commercial paper. B) Treasury bills. C) repurchase agreements. D) bank deposits.
D
In what year did the economy return to normal conditions following the Great Depression? A) 1933 B) 1937 C) 1941 D) 1945
D
Most of the TARP funds were used to A) fund a stimulus package. B) pay for losses incurred by Fannie Mae and Freddie Mac. C) finance the operations of the Federal Reserve. D) make direct purchases of preferred stock in banks to increase their capital.
D
Research by Reinhart and Rogoff indicate that most of the increase in national debt as a result of a financial crisis is due to A) government bailouts of financial institutions. B) increased spending on social welfare programs. C) government stimulus programs. D) sharp declines in tax revenues.
D
The era of bank panics in the United States was effectively ended by A) establishing the Fed as lender of last resort. B) implementing the gold standard. C) abandoning the gold standard. D) introducing deposit insurance.
D
The fourth stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.
D
The process in which a cycle of falling asset prices and falling prices of goods and services can increase the severity of an economic downturn is called a A) financial crisis. B) bank run. C) sovereign debt crisis. D) debt-deflation process.
D
What happened to real interest rates during the early 1930s? A) They declined as nominal interest rates declined. B) They rose as nominal interest rates rose. C) They declined due to deflation. D) They rose due to deflation.
D
Which investment caused the Reserve Primary Fund to incur heavy losses? A) mortgage-backed securities B) real estate investment trusts C) commercial paper issued by Bear Stearns D) commercial paper issued by Lehman Brothers
D