Question 1

In the 1970s and 1980s, savings banks invented NOW accounts to get around financial regulations. This is an example of:

Accepted Answer

A) a moral hazard problem. 
B) deleveraging. 
C) the law of diminishing control. 
D) quantitative easing. 
A) a moral hazard problem. 
B) deleveraging. 
C) the law of diminishing control. 
D) quantitative easing.

Question 2

All of the following are examples of the law of diminishing control that followed banking regulations put in place after the Great Depression except:

Accepted Answer

A) banks created new instruments to circumvent the law. 
B) financial business migrated to unregulated institutions. 
C) depositors demanded financial institutions be responsible for their financial decisions. 
D) politicians were pressured to dismantle the regulations. 
A) banks created new instruments to circumvent the law. 
B) financial business migrated to unregulated institutions. 
C) depositors demanded financial institutions be responsible for their financial decisions. 
D) politicians were pressured to dismantle the regulations.

Question 3

Potential homebuyers expect house prices to continue to rise, which causes others to believe that they will rise even faster. This is an example of:

Accepted Answer

A) imperfect expectations. 
B) heightened expectations. 
C) extrapolative expectations. 
D) irrational expectations. 
A) imperfect expectations. 
B) heightened expectations. 
C) extrapolative expectations. 
D) irrational expectations.

Question 4

What role do almost all economists agree the central bank has in a financial crisis?

Accepted Answer

A) Contractionary fiscal policy to reduce leverage 
B) Lender of last resort 
C) Expansionary fiscal policy to reduce herding 
D) No role 
A) Contractionary fiscal policy to reduce leverage 
B) Lender of last resort 
C) Expansionary fiscal policy to reduce herding 
D) No role

Question 5

When there are unsustainable rapidly rising prices of some type of financial asset, such as stocks, we refer to this as a(n):

Accepted Answer

A) liquidity trap. 
B) asset price bubble. 
C) bad-precedent problem. 
D) moral-hazard problem. 
A) liquidity trap. 
B) asset price bubble. 
C) bad-precedent problem. 
D) moral-hazard problem.

Question 6

The 2008 financial crisis was caused largely by:

Accepted Answer

A) a run on banks and other financial institutions. 
B) a bursting of the automobile market bubble. 
C) a bursting of the housing market bubble. 
D) by the inability of the government to issue Treasury bonds. 
A) a run on banks and other financial institutions. 
B) a bursting of the automobile market bubble. 
C) a bursting of the housing market bubble. 
D) by the inability of the government to issue Treasury bonds.

Question 7

An important reason why unconventional monetary policy was kept was that the:

Accepted Answer

A) inflation rate remained low. 
B) inflation rate remained high. 
C) short-term interest rate remained low. 
D) short-term interest rate remained high. 
A) inflation rate remained low. 
B) inflation rate remained high. 
C) short-term interest rate remained low. 
D) short-term interest rate remained high.

Question 8

Whenever a regulatory system is set up, individuals or firms being regulated will figure out ways to get around these regulations. This is referred to as the law of:

Accepted Answer

A) diminishing returns. 
B) unintended consequences. 
C) diminishing control. 
D) demand. 
A) diminishing returns. 
B) unintended consequences. 
C) diminishing control. 
D) demand.

Question 9

The following is an example of the moral-hazard problem: Homebuyers do not properly evaluate the risks involved in buying a home, because they are assuming the government will bail them out of a bad mortgage as it has done before.

Accepted Answer

A) True 
 B)False

Question 10

The efficient market hypothesis suggests that:

Accepted Answer

A) while individuals can be irrational, collectively they will not. 
B) because individuals are rational, collectively they are also rational. 
C) irrationality must a part of every economic model. 
D) asset price bubbles are efficient. 
A) while individuals can be irrational, collectively they will not. 
B) because individuals are rational, collectively they are also rational. 
C) irrationality must a part of every economic model. 
D) asset price bubbles are efficient.

Question 11

During the 2008/09 recession, the Fed bailed out 25 percent of banks to keep them solvent.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following was not a direct contributor to the booming housing market in the 2000s?

Accepted Answer

A) People were expecting housing prices to keep on rising. 
B) People could get mortgages with little or no money down. 
C) Lending standards became loose. 
D) Contractionary policy was passed in 2001. 
A) People were expecting housing prices to keep on rising. 
B) People could get mortgages with little or no money down. 
C) Lending standards became loose. 
D) Contractionary policy was passed in 2001.

Question 13

Which of the following was not a contributing factor to the housing market boom of the 2000s?

Accepted Answer

A) Low interest rates 
B) Mortgages with no or little money down 
C) The merging of large banks giving them more assets 
D) Scant concern given to people's ability to meet the mortgage payment 
A) Low interest rates 
B) Mortgages with no or little money down 
C) The merging of large banks giving them more assets 
D) Scant concern given to people's ability to meet the mortgage payment

Question 14

According to structural stagnationists there is an argument to be made that the Fed should return to standard monetary policy.

Accepted Answer

A) True 
 B)False

Question 15

Extrapolative expectations work when prices are rising, but not when prices decline.

Accepted Answer

A) True 
 B)False

Question 16

The Fed followed a precommitment policy when it promised to keep short-term interest rates low for a period of time after the 2008/09 U.S. recession.

Accepted Answer

A) True 
 B)False

Question 17

Briefly discuss the leveraging that took place in the early 2000s that caused what could have been simply a bursting bubble to turn into a financial crisis.

Accepted Answer

Housing prices were rising nationally in

Question 18

A general principle of regulation is:

Accepted Answer

A) do not offset the moral hazard problem. 
B) set as few bad precedents as possible. 
C) let banks fail regardless of the effect on the economy. 
D) the need to reduce regulations over time. 
A) do not offset the moral hazard problem. 
B) set as few bad precedents as possible. 
C) let banks fail regardless of the effect on the economy. 
D) the need to reduce regulations over time.

Question 19

Which of the following would not address the moral hazard problem?

Accepted Answer

A) Establish strict regulations of the banks 
B) Design systems so that necessary financial transactions stayed within regulated banks 
C) Allow the government to take over the policy-making decisions of the Federal Reserve 
D) Separate banks from other financial institutions 
A) Establish strict regulations of the banks 
B) Design systems so that necessary financial transactions stayed within regulated banks 
C) Allow the government to take over the policy-making decisions of the Federal Reserve 
D) Separate banks from other financial institutions

Question 20

Which of the following is not an example of moral hazard?

Accepted Answer

A) Investment banks use 40-1 leverage, knowing that if the market collapses, the government will come to the rescue. 
B) Domestic automobile companies fail to design high-quality fuel-efficient cars, hoping that the government will save them if oil prices skyrocket. 
C) A backcountry skier takes an excessively dangerous run, knowing that local rescue crews will come to his aid if he gets in an accident. 
D) Insurance companies stopped offering insurance policies in New Orleans after a major hurricane, knowing the government will offer subsidies to draw people back. 
A) Investment banks use 40-1 leverage, knowing that if the market collapses, the government will come to the rescue. 
B) Domestic automobile companies fail to design high-quality fuel-efficient cars, hoping that the government will save them if oil prices skyrocket. 
C) A backcountry skier takes an excessively dangerous run, knowing that local rescue crews will come to his aid if he gets in an accident. 
D) Insurance companies stopped offering insurance policies in New Orleans after a major hurricane, knowing the government will offer subsidies to draw people back.

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

In the 1970s and 1980s, savings banks invented NOW accounts to get around financial regulations. This is an example of:

All of the following are examples of the law of diminishing control that followed banking regulations put in place after the Great Depression except:

Potential homebuyers expect house prices to continue to rise, which causes others to believe that they will rise even faster. This is an example of:

What role do almost all economists agree the central bank has in a financial crisis?

When there are unsustainable rapidly rising prices of some type of financial asset, such as stocks, we refer to this as a(n):

The 2008 financial crisis was caused largely by:

An important reason why unconventional monetary policy was kept was that the:

Whenever a regulatory system is set up, individuals or firms being regulated will figure out ways to get around these regulations. This is referred to as the law of:

The following is an example of the moral-hazard problem: Homebuyers do not properly evaluate the risks involved in buying a home, because they are assuming the government will bail them out of a bad mortgage as it has done before.

The efficient market hypothesis suggests that:

During the 2008/09 recession, the Fed bailed out 25 percent of banks to keep them solvent.

Which of the following was not a direct contributor to the booming housing market in the 2000s?

Which of the following was not a contributing factor to the housing market boom of the 2000s?

According to structural stagnationists there is an argument to be made that the Fed should return to standard monetary policy.

Extrapolative expectations work when prices are rising, but not when prices decline.

The Fed followed a precommitment policy when it promised to keep short-term interest rates low for a period of time after the 2008/09 U.S. recession.

Briefly discuss the leveraging that took place in the early 2000s that caused what could have been simply a bursting bubble to turn into a financial crisis.

A general principle of regulation is:

Which of the following would not address the moral hazard problem?

Which of the following is not an example of moral hazard?

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

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Who Gets What the Distribution of Income

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