Question 1

Selling short-term treasury bills and buying longer-term treasury bonds without creating more new money is called:

Accepted Answer

A) standard monetary policy. 
B) operation twist. 
C) quantitative easing. 
D) precommitment policy. 
A) standard monetary policy. 
B) operation twist. 
C) quantitative easing. 
D) precommitment policy. B

Question 2

Mortgage-backed securities are financial instruments:

Accepted Answer

A) that are highly risky. 
B) that are extremely safe. 
C) whose value depends on the value of mortgages. 
D) that are highly leveraged, but which offer high returns. 
A) that are highly risky. 
B) that are extremely safe. 
C) whose value depends on the value of mortgages. 
D) that are highly leveraged, but which offer high returns. C

Question 3

Suppose you work in investments for a financial institution, and other banks are making a fortune with Irish goldmines. The fact that you are more likely to move to invest in Irish goldmines just because you see other banks doing so is called:

Accepted Answer

A) the law of diminishing control. 
B) leverage. 
C) herding. 
D) diversification. 
A) the law of diminishing control. 
B) leverage. 
C) herding. 
D) diversification. C

Question 4

Which of the following does not explain why the Glass-Steagall regulations lost their effectiveness?

Accepted Answer

A) Over time, nonbank financial firms were able to borrow directly from the public, rather than having to borrow from commercial banks. 
B) The Federal Reserve created regulations that ran counter to what the government was trying to do. 
C) With the advent of new financial instruments, regulated banks lost business to unregulated institutions, and credit began to flow through unregulated systems. 
D) As regulations became too successful, people wanted to eliminate these regulations in order to pursue the magic of the free market. 
A) Over time, nonbank financial firms were able to borrow directly from the public, rather than having to borrow from commercial banks. 
B) The Federal Reserve created regulations that ran counter to what the government was trying to do. 
C) With the advent of new financial instruments, regulated banks lost business to unregulated institutions, and credit began to flow through unregulated systems. 
D) As regulations became too successful, people wanted to eliminate these regulations in order to pursue the magic of the free market.

Question 5

Structural stagnationists argue that unconventional monetary policy tools were necessary to restore order in the banking system.

Accepted Answer

A) True 
 B)False

Question 6

What are quantitative easing tools? Why are they necessary?

Accepted Answer

Quantitative easing tools are nonstandar

Question 7

Which of the following describes the law of diminishing control?

Accepted Answer

A) The Federal Reserve Bank cannot impact excess reserves and the money supply. 
B) Financial institutions have few ways to assess the solvency of borrowers. 
C) After regulations are enacted, institutions find ways around the regulations. 
D) As people engage in leverage, they have less and less control over the price of the asset. 
A) The Federal Reserve Bank cannot impact excess reserves and the money supply. 
B) Financial institutions have few ways to assess the solvency of borrowers. 
C) After regulations are enacted, institutions find ways around the regulations. 
D) As people engage in leverage, they have less and less control over the price of the asset.

Question 8

Why are financial-sector crises scarier than collapses in other sectors of the economy?

Accepted Answer

A) The financial sector is the biggest sector. 
B) Financial-sector crises happen more often than collapses in other sectors. 
C) Most people work in the financial sector. 
D) If the financial sector fails, it can bring the whole economy down with it. 
A) The financial sector is the biggest sector. 
B) Financial-sector crises happen more often than collapses in other sectors. 
C) Most people work in the financial sector. 
D) If the financial sector fails, it can bring the whole economy down with it.

Question 9

What is the definition of herding and how does it contribute to bubbles?

Accepted Answer

Herding is the human tendency to follow

Question 10

Which of the following would not fall under the description of unconventional monetary policy by the Federal Reserve?

Accepted Answer

A) Accepting lower quality assets as collateral for loans 
B) Opening lending facilities to noncommercial banks 
C) Directly purchasing short-term bonds from money market mutual funds 
D) Lowering the reserve requirement for banks 
A) Accepting lower quality assets as collateral for loans 
B) Opening lending facilities to noncommercial banks 
C) Directly purchasing short-term bonds from money market mutual funds 
D) Lowering the reserve requirement for banks

Question 11

When a central bank is acting as a lender of last resort, it is:

Accepted Answer

A) buying long-term Treasury bonds and selling short-term Treasury notes. 
B) buying Treasury bills directly from the public. 
C) providing banks with Treasury bills for free. 
D) providing banks with liquidity to meet their obligations. 
A) buying long-term Treasury bonds and selling short-term Treasury notes. 
B) buying Treasury bills directly from the public. 
C) providing banks with Treasury bills for free. 
D) providing banks with liquidity to meet their obligations.

Question 12

Give an example of a new regulation that came out of the Great Depression.

Accepted Answer

Student answers may vary.The G

Question 13

A company borrows money to supplement its current funds and uses it to buy more financial assets. This is what referred to as:

Accepted Answer

A) diversification. 
B) leverage. 
C) quantitative easing. 
D) herding. 
A) diversification. 
B) leverage. 
C) quantitative easing. 
D) herding.

Question 14

Why could leverage lead to an asset price bubble?

Accepted Answer

A) It allows investors to take advantage of disinflation. 
B) It takes advantage of insiders who help outsiders. 
C) It increases the ability of people to purchase financial instruments. 
D) It takes advantage of extrapolative expectations. 
A) It allows investors to take advantage of disinflation. 
B) It takes advantage of insiders who help outsiders. 
C) It increases the ability of people to purchase financial instruments. 
D) It takes advantage of extrapolative expectations.

Question 15

According to the efficient market hypothesis, rational people will not recognize that asset prices are rising too quickly.

Accepted Answer

A) True 
 B)False

Question 16

How did the Fed respond to the financial crisis in 2008? How did the federal government respond?

Accepted Answer

The Fed cut the Fed funds rate

Question 17

When the Fed promised to hold the Fed funds rate close to zero until the end of 2014, it was:

Accepted Answer

A) carrying out what's known as operation twist. 
B) carrying out what is known as credit easing. 
C) following a precommitment policy. 
D) following a policy that was recommended by Congress. 
A) carrying out what's known as operation twist. 
B) carrying out what is known as credit easing. 
C) following a precommitment policy. 
D) following a policy that was recommended by Congress.

Question 18

Which of the following is not one of the unconventional monetary policy tools used by the Fed?

Accepted Answer

A) Precommitment strategy 
B) Quantitative easing 
C) Operation twist 
D) Dodd-Frank Act 
A) Precommitment strategy 
B) Quantitative easing 
C) Operation twist 
D) Dodd-Frank Act

Question 19

Which is not a measure instituted to offset the moral hazard problem created by the FDIC?

Accepted Answer

A) Established strict regulations of banks 
B) The creation of the Federal Reserve Bank 
C) Separating banks from other financial institutions 
D) Require financial transactions essential to the economy to remain in banks 
A) Established strict regulations of banks 
B) The creation of the Federal Reserve Bank 
C) Separating banks from other financial institutions 
D) Require financial transactions essential to the economy to remain in banks

Question 20

What would likely have the most severe immediate effect on an economy?

Accepted Answer

A) A significant drop in exports 
B) The Fed's infusing reserves into the economy 
C) An aggregate demand shock 
D) A failure of the financial sector 
A) A significant drop in exports 
B) The Fed's infusing reserves into the economy 
C) An aggregate demand shock 
D) A failure of the financial sector

Exam 30: Financial Crises, Panics, and Unconventional Monetary Policy

Selling short-term treasury bills and buying longer-term treasury bonds without creating more new money is called:

Mortgage-backed securities are financial instruments:

Suppose you work in investments for a financial institution, and other banks are making a fortune with Irish goldmines. The fact that you are more likely to move to invest in Irish goldmines just because you see other banks doing so is called:

Which of the following does not explain why the Glass-Steagall regulations lost their effectiveness?

Structural stagnationists argue that unconventional monetary policy tools were necessary to restore order in the banking system.

What are quantitative easing tools? Why are they necessary?

Which of the following describes the law of diminishing control?

Why are financial-sector crises scarier than collapses in other sectors of the economy?

What is the definition of herding and how does it contribute to bubbles?

Which of the following would not fall under the description of unconventional monetary policy by the Federal Reserve?

When a central bank is acting as a lender of last resort, it is:

Give an example of a new regulation that came out of the Great Depression.

A company borrows money to supplement its current funds and uses it to buy more financial assets. This is what referred to as:

Why could leverage lead to an asset price bubble?

According to the efficient market hypothesis, rational people will not recognize that asset prices are rising too quickly.

How did the Fed respond to the financial crisis in 2008? How did the federal government respond?

When the Fed promised to hold the Fed funds rate close to zero until the end of 2014, it was:

Which of the following is not one of the unconventional monetary policy tools used by the Fed?

Which is not a measure instituted to offset the moral hazard problem created by the FDIC?

What would likely have the most severe immediate effect on an economy?

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