Question 1

The Franklin National Bank Crisis had its greatest impact on the market for

Accepted Answer

A) commercial paper. 
B) commodity futures. 
C) negotiable certificates of deposit. 
D) Eurodollars. 
A) commercial paper. 
B) commodity futures. 
C) negotiable certificates of deposit. 
D) Eurodollars. C

Question 2

In late 1998 the Fed averted a possible financial panic by

Accepted Answer

A) lowering interest rates. 
B) raising interest rates. 
C) using its influence to bring together the creditors of Long-Term Capital Management. 
D) using its influence to encourage banks to make loans to broker-dealers in the securities industry. 
A) lowering interest rates. 
B) raising interest rates. 
C) using its influence to bring together the creditors of Long-Term Capital Management. 
D) using its influence to encourage banks to make loans to broker-dealers in the securities industry. C

Question 3

Which of the following statements about the Penn Central Railroad crisis is NOT true?

Accepted Answer

A) The crisis resulted in a large decline in commercial paper lending. 
B) The crisis was ended by the Fed making credit available to commercial banks. 
C) During the crisis, banks made loans to companies that would normally have used the commercial paper market. 
D) The Fed's charter greatly restricted the number of banks to which it could make loans. 
A) The crisis resulted in a large decline in commercial paper lending. 
B) The crisis was ended by the Fed making credit available to commercial banks. 
C) During the crisis, banks made loans to companies that would normally have used the commercial paper market. 
D) The Fed's charter greatly restricted the number of banks to which it could make loans. D

Question 4

A credit crunch refers to a

Accepted Answer

A) sharp rise in interest rates that banks charge on business loans. 
B) sharp rise in interest rates that banks charge on consumer loans. 
C) decline in the willingness of households and firms to borrow from banks. 
D) reduction in borrowers' ability to obtain credit at prevailing interest rates. 
A) sharp rise in interest rates that banks charge on business loans. 
B) sharp rise in interest rates that banks charge on consumer loans. 
C) decline in the willingness of households and firms to borrow from banks. 
D) reduction in borrowers' ability to obtain credit at prevailing interest rates.

Question 5

During the early 1980s, Congress relaxed restrictions on the asset holdings of S&Ls by allowing them to hold all of the following EXCEPT

Accepted Answer

A) junk bonds. 
B) commercial mortgages. 
C) direct real estate investments. 
D) corporate stock. 
A) junk bonds. 
B) commercial mortgages. 
C) direct real estate investments. 
D) corporate stock.

Question 6

Large commercial banks responded to the Credit Crunch of 1966 by

Accepted Answer

A) raising the interest rates they paid on deposits. 
B) borrowing from the Fed. 
C) raising funds through unregulated sources. 
D) increasing their participation in the commercial paper market. 
A) raising the interest rates they paid on deposits. 
B) borrowing from the Fed. 
C) raising funds through unregulated sources. 
D) increasing their participation in the commercial paper market.

Question 7

In 2006 the assets of money market mutual funds were approximately

Accepted Answer

A) $100 billion. 
B) $627 billion. 
C) $1075 billion. 
D) $2014 billion. 
A) $100 billion. 
B) $627 billion. 
C) $1075 billion. 
D) $2014 billion.

Question 8

Narrow banking is seen by some economists as an answer to the problem of

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) the decline in competition in the banking industry. 
D) the ineffectiveness of the Fed's use of discount loans. 
A) adverse selection. 
B) moral hazard. 
C) the decline in competition in the banking industry. 
D) the ineffectiveness of the Fed's use of discount loans.

Question 9

The usual response of the banking system to new government regulations is

Accepted Answer

A) evasion through whatever means are necessary. 
B) strict compliance. 
C) an attempt to circumvent the regulations through financial innovation. 
D) bankruptcy. 
A) evasion through whatever means are necessary. 
B) strict compliance. 
C) an attempt to circumvent the regulations through financial innovation. 
D) bankruptcy.

Question 10

Congress created the Federal Reserve System

Accepted Answer

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) 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.

Question 11

A rise in interest rates hurts thrifts because it

Accepted Answer

A) reduces their net worth. 
B) raises the market value of their mortgages. 
C) decreases their cost of funds. 
D) increases their tax liability to the federal government. 
A) reduces their net worth. 
B) raises the market value of their mortgages. 
C) decreases their cost of funds. 
D) increases their tax liability to the federal government.

Question 12

Historically, commercial banks have dominated the short-term credit market by

Accepted Answer

A) specializing in reducing information costs. 
B) being willing to pay whatever rate is necessary to attract deposits. 
C) maintaining only short-term relationships with borrowers. 
D) issuing commercial paper. 
A) specializing in reducing information costs. 
B) being willing to pay whatever rate is necessary to attract deposits. 
C) maintaining only short-term relationships with borrowers. 
D) issuing commercial paper.

Question 13

Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s?

Accepted Answer

A) The Fed's inability to lend against anything other than good commercial loans 
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 
A) The Fed's inability to lend against anything other than good commercial loans 
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

Question 14

Under narrow banking,

Accepted Answer

A) banks would make loans only from bank equity. 
B) banks would not be allowed more than one branch. 
C) federal deposit insurance would be eliminated. 
D) banks would not be allowed to make any risky loans. 
A) banks would make loans only from bank equity. 
B) banks would not be allowed more than one branch. 
C) federal deposit insurance would be eliminated. 
D) banks would not be allowed to make any risky loans.

Question 15

Disintermediation refers to the

Accepted Answer

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. 
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.

Question 16

Which of the following statements concerning federal deposit insurance is NOT true?

Accepted Answer

A) The FDIC, in effect, insures all deposits in large banks. 
B) Regulators have been reluctant to impose a coinsurance requirement on deposit insurance. 
C) Regulators have been reluctant to reduce the dollar value of deposits that can be insured. 
D) The FDIC seems likely to do away with the too-big-to-fail doctrine. 
A) The FDIC, in effect, insures all deposits in large banks. 
B) Regulators have been reluctant to impose a coinsurance requirement on deposit insurance. 
C) Regulators have been reluctant to reduce the dollar value of deposits that can be insured. 
D) The FDIC seems likely to do away with the too-big-to-fail doctrine.

Question 17

The first crucial test for the Fed as a lender of last resort occurred

Accepted Answer

A) as Southern banks left the system during the Civil War. 
B) as the federal government needed to raise large amounts of money during World War I. 
C) during the S&L crisis of the 1980s. 
D) following the stock market crash of October 1929. 
A) as Southern banks left the system during the Civil War. 
B) as the federal government needed to raise large amounts of money during World War I. 
C) during the S&L crisis of the 1980s. 
D) following the stock market crash of October 1929.

Question 18

The McCarran-Ferguson Act of 1945

Accepted Answer

A) established the FDIC. 
B) established the FSLIC. 
C) exempted insurance companies from federal antitrust laws. 
D) made insurance companies subject to federal antitrust laws. 
A) established the FDIC. 
B) established the FSLIC. 
C) exempted insurance companies from federal antitrust laws. 
D) made insurance companies subject to federal antitrust laws.

Question 19

Negotiable order of withdrawal accounts

Accepted Answer

A) are available only to large depositors. 
B) are like checking accounts, but may not legally pay interest. 
C) first appeared in New England during the early 1970s. 
D) were declared illegal in the Depository Institution Deregulation and Monetary Control Act of 1980. 
A) are available only to large depositors. 
B) are like checking accounts, but may not legally pay interest. 
C) first appeared in New England during the early 1970s. 
D) were declared illegal in the Depository Institution Deregulation and Monetary Control Act of 1980.

Question 20

During the early- to mid-1980s, thrifts in which parts of the country were particularly hard hit?

Accepted Answer

A) Those in the industrial areas of the northeast 
B) Those in the industrial areas of the midwest 
C) Those in areas dependent on the tourist trade, such as California and Florida 
D) Those in areas dependent on farming or energy, such as Texas 
A) Those in the industrial areas of the northeast 
B) Those in the industrial areas of the midwest 
C) Those in areas dependent on the tourist trade, such as California and Florida 
D) Those in areas dependent on farming or energy, such as Texas

Exam 15: Banking Regulation: Crisis and Response

The Franklin National Bank Crisis had its greatest impact on the market for

In late 1998 the Fed averted a possible financial panic by

Which of the following statements about the Penn Central Railroad crisis is NOT true?

A credit crunch refers to a

During the early 1980s, Congress relaxed restrictions on the asset holdings of S&Ls by allowing them to hold all of the following EXCEPT

Large commercial banks responded to the Credit Crunch of 1966 by

In 2006 the assets of money market mutual funds were approximately

Narrow banking is seen by some economists as an answer to the problem of

The usual response of the banking system to new government regulations is

Congress created the Federal Reserve System

A rise in interest rates hurts thrifts because it

Historically, commercial banks have dominated the short-term credit market by

Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s?

Under narrow banking,

Disintermediation refers to the

Which of the following statements concerning federal deposit insurance is NOT true?

The first crucial test for the Fed as a lender of last resort occurred

The McCarran-Ferguson Act of 1945

Negotiable order of withdrawal accounts

During the early- to mid-1980s, thrifts in which parts of the country were particularly hard hit?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters