Exam 18: The Financial Crisis of 2007-2009

A bank initially has $620 million in assets and $580 million in liabilities. The banks net worth (capital)is _____________ million. If the bank's assets decline by 5% and its liabilities do not change,its capital decreases by ____________ .

According to John Taylor (for whom the Taylor rule is named),during the period 2002-early 2006 actual Fed policy was "too_________" ,which he believes led to both interest rates being "too ________" and rising housing prices in the United States.

For a bank,more capital means more _____________,and it also means ___________ returns when asset values are rising.

For financial institutions,securitization is the means by which regulatory capital arbitrage lowers capital requirements.

If nominal GDP is declining,it is necessarily true that Real GDP is also declining.

Former Fed Chairman Alan Greenspan has argued that low ___________ interest rates,not ______________ interest rates,were the cause of the housing boom in the late 1990s and early 2000s. He also argued that the Fed has more control over _______________ rates than over ____________ rates.

One of the contributing factors to the financial crisis of 2007-2009 was that mortgage lending practices were ____________ strict in the late 1990s and early 2000s,compared to earlier periods such as the 1970s and 1980s,which led to a(n)_______________ in subprime and other nontraditional mortgage loans.

A ____________________ loan is a nontraditional mortgage loan granted to persons who have some factor,such as low credit ratings,which suggest that they could default on the repayment of their debt.

In the early 2000s,banks lowered lending standards to comply with the Community Reinvestment Act.

Regulatory capital is the amount of capital financial institutions should hold based on the riskiness of their different assets.

Which of the following statements is false?

When borrowers are unable to make their monthly mortgage payments,the value of mortgage-backed securities and collateralized debt obligations

During a time of rising asset values,a bank can increase its returns by engaging in regulatory capital arbitrage.

There are some economists who argue that low mortgage interest rates in the time period preceeding the financial crisis of 2007-2009 were a result of a ___________ in global savings. They argue that emerging countries began to save ___________ which helped to _____________ the supply of loanable funds in the United States.

A bank with a leverage ratio of 9 to 1 has

The _______________________ (TARP)is an example of a government program created to help stabilize the financial sector during the financial crisis of 2007-2009.

If the value of a bank's assets is rising,a high leverage ratio increases the percentage rise in its capital.

A bank has $150 million in assets and $90 million in liabilities. The bank's net worth is _____________ million and the bank is ____________.

Some economists argue that the Fed set its federal funds rate target "too _________" in the early 2000s,which was one of the contributing factors which led to ____________ mortgage interest rates and a(n)___________ housing prices.

According to John Taylor,during the period 2002-early 2006 the Fed set its federal funds rate target _____________ the rate that would have existed had the Fed set its target using the Taylor rule.