Question 1

An SEC rule change allowing investment banks to increase the leverage of their investment capital prompted many investment banks to

Accepted Answer

A) increase the amount of assets held in relation to mortgage-backed securities being issued. 
B) decrease the amount of assets held in relation to mortgage-backed securities being issued. 
C) decrease the amount of mortgage-backed securities being offered. 
D) reduce the ratio of mortgage loans to equity capital of the investment bank. 
A) increase the amount of assets held in relation to mortgage-backed securities being issued. 
B) decrease the amount of assets held in relation to mortgage-backed securities being issued. 
C) decrease the amount of mortgage-backed securities being offered. 
D) reduce the ratio of mortgage loans to equity capital of the investment bank.

Question 2

Are new regulations likely to prevent a future financial crisis?

Accepted Answer

A) Yes,regulatory agencies have been effective at anticipating the secondary effects of new regulations. 
B) Yes,industries that were highly regulated were unaffected by the Crisis of 2008. 
C) No,regulators have a poor record with regard to foreseeing future problems. 
D) No,current regulations could have prevented the Crisis of 2008,but were largely ignored. 
A) Yes,regulatory agencies have been effective at anticipating the secondary effects of new regulations. 
B) Yes,industries that were highly regulated were unaffected by the Crisis of 2008. 
C) No,regulators have a poor record with regard to foreseeing future problems. 
D) No,current regulations could have prevented the Crisis of 2008,but were largely ignored.

Question 3

Which of the following reforms would reduce the likelihood of a future financial crisis?

Accepted Answer

A) increased regulations that would make it more difficult for lenders to foreclose on borrowers who are delinquent on mortgage payments 
B) expansion of government-sponsored lending in order to make loanable funds more readily available to sub-prime borrowers 
C) institutional changes that would strengthen the property rights of shareholders and provide financial managers with a stronger incentive to pursue long-run objectives 
D) frequent regulatory changes in order to search for and find the combination that would be most effective 
A) increased regulations that would make it more difficult for lenders to foreclose on borrowers who are delinquent on mortgage payments 
B) expansion of government-sponsored lending in order to make loanable funds more readily available to sub-prime borrowers 
C) institutional changes that would strengthen the property rights of shareholders and provide financial managers with a stronger incentive to pursue long-run objectives 
D) frequent regulatory changes in order to search for and find the combination that would be most effective

Question 4

Interest payments on home mortgages and home equity loans are tax deductible.This tax deductibility encourages households to

Accepted Answer

A) shift other forms of debt to their home mortgage. 
B) increase the equity in their house. 
C) make larger payments and pay down their mortgage loan more rapidly. 
D) decrease the overall amount of household debt in relation to household income. 
A) shift other forms of debt to their home mortgage. 
B) increase the equity in their house. 
C) make larger payments and pay down their mortgage loan more rapidly. 
D) decrease the overall amount of household debt in relation to household income.

Question 5

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Accepted Answer

A) housing prices to fall during that period. 
B) a reduction in the use of adjustable rate mortgages to finance the purchase of housing. 
C) a reduction in housing construction during 2002-2005. 
D) mal-investment,that is,excessive investment in housing construction during 2002-2005. 
A) housing prices to fall during that period. 
B) a reduction in the use of adjustable rate mortgages to finance the purchase of housing. 
C) a reduction in housing construction during 2002-2005. 
D) mal-investment,that is,excessive investment in housing construction during 2002-2005.

Question 6

Compared to the 1970s and early 1980s,household debt as a share of income in 2007 has

Accepted Answer

A) increased at a steady rate over time. 
B) remained about the same. 
C) more than doubled. 
D) decreased slowly over time. 
A) increased at a steady rate over time. 
B) remained about the same. 
C) more than doubled. 
D) decreased slowly over time.

Question 7

After a period of price stability in the 1990s,housing prices increased dramatically during 2002-2005 because

Accepted Answer

A) regulations designed to make housing more affordable increased the demand for housing and drove housing prices upward. 
B) regulations designed to make housing more affordable decreased the number of sub-prime loans and made home buying a safer investment. 
C) mortgage lending standards tightened,and therefore mortgage loans for housing were only available to buyers purchasing highly expensive homes. 
D) home buyers were putting more money down and requiring more return on their investment,driving housing prices up. 
A) regulations designed to make housing more affordable increased the demand for housing and drove housing prices upward. 
B) regulations designed to make housing more affordable decreased the number of sub-prime loans and made home buying a safer investment. 
C) mortgage lending standards tightened,and therefore mortgage loans for housing were only available to buyers purchasing highly expensive homes. 
D) home buyers were putting more money down and requiring more return on their investment,driving housing prices up.

Question 8

Since the mid-1990s,the percentage of new mortgages categorized as sub-prime or Alt-A loans has

Accepted Answer

A) remained steady at about 5 percent of all loans. 
B) decreased to about one third of all loans,while conventional loans have increased to about two-thirds. 
C) increased to about one third of all loans,while conventional loans have decreased to about one third as well. 
D) decreased as a result of regulations designed to tighten loan standards. 
A) remained steady at about 5 percent of all loans. 
B) decreased to about one third of all loans,while conventional loans have increased to about two-thirds. 
C) increased to about one third of all loans,while conventional loans have decreased to about one third as well. 
D) decreased as a result of regulations designed to tighten loan standards.

Question 9

When housing prices fell during 2007,the mortgage default rate

Accepted Answer

A) declined as well. 
B) responded in a similar manner as during other recent recessions. 
C) increased substantially. 
D) changed very little. 
A) declined as well. 
B) responded in a similar manner as during other recent recessions. 
C) increased substantially. 
D) changed very little.

Question 10

The 1995 modifications to the Community Reinvestment Act

Accepted Answer

A) imposed numeric goals for loans extended to low-income and minority groups that were difficult for many banks to meet without reducing loan standards. 
B) reduced the incentive of banks to extend loans to low-income and minority groups. 
C) encouraged low-income and minority housing purchasers to make larger down payments so they would have more equity in their houses. 
D) made it more difficult for low-income and minority groups to obtain conventional loans. 
A) imposed numeric goals for loans extended to low-income and minority groups that were difficult for many banks to meet without reducing loan standards. 
B) reduced the incentive of banks to extend loans to low-income and minority groups. 
C) encouraged low-income and minority housing purchasers to make larger down payments so they would have more equity in their houses. 
D) made it more difficult for low-income and minority groups to obtain conventional loans.

Question 11

Since 1995,federal regulations have

Accepted Answer

A) tightened mortgage lending standards and therefore made it difficult to obtain a loan to purchase a house. 
B) increased the down payment housing buyers are required to make in order to obtain a mortgage loan. 
C) loosened lending standards and made it possible for many buyers to purchase a house with little or no down payment. 
D) required investment banks to maintain more capital against their holdings of mortgage loans. 
A) tightened mortgage lending standards and therefore made it difficult to obtain a loan to purchase a house. 
B) increased the down payment housing buyers are required to make in order to obtain a mortgage loan. 
C) loosened lending standards and made it possible for many buyers to purchase a house with little or no down payment. 
D) required investment banks to maintain more capital against their holdings of mortgage loans.

Question 12

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Accepted Answer

A) an increase in demand for housing and higher housing prices. 
B) an increase in demand for housing and lower housing prices. 
C) a reduction in demand for housing and higher housing prices. 
D) a reduction in demand for housing and lower housing prices. 
A) an increase in demand for housing and higher housing prices. 
B) an increase in demand for housing and lower housing prices. 
C) a reduction in demand for housing and higher housing prices. 
D) a reduction in demand for housing and lower housing prices.

Question 13

Fannie Mae and Freddie Mac's dominance of the secondary mortgage market during 1995-2008 encouraged mortgage originators to

Accepted Answer

A) extend only 30-year,fixed-rate mortgages. 
B) require higher down payments in order to obtain a home mortgage. 
C) loosen lending standards as long as the mortgages were acceptable to Fannie Mae and Freddie Mac. 
D) scrutinize the credit-worthiness of borrowers more carefully. 
A) extend only 30-year,fixed-rate mortgages. 
B) require higher down payments in order to obtain a home mortgage. 
C) loosen lending standards as long as the mortgages were acceptable to Fannie Mae and Freddie Mac. 
D) scrutinize the credit-worthiness of borrowers more carefully.

Question 14

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Accepted Answer

A) The bonus structure of most executives was tied to long-term profitability. 
B) The ratings agencies were paid attractive fees by investment banks seeking high ratings for their securities. 
C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings. 
D) Despite SEC regulations,investment banks kept leverage ratios low in order to increase profits. 
A) The bonus structure of most executives was tied to long-term profitability. 
B) The ratings agencies were paid attractive fees by investment banks seeking high ratings for their securities. 
C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings. 
D) Despite SEC regulations,investment banks kept leverage ratios low in order to increase profits.

Question 15

Residential mortgages historically carried a capital requirement of 4 percent.Why did these mortgages,bundled as part of the mortgage-backed securities issued by investment banks,turn out to be far more risky than historically indicated?

Accepted Answer

A) Rating agencies miscalculated the historical risk of traditional fixed-rate residential mortgages. 
B) Investment banks leveraged these mortgage-backed securities more than was allowable under SEC rules. 
C) Lower mortgage lending standards increased the likelihood that defaults would occur. 
D) Investment banks held too much capital relative to these mortgage-backed securities. 
A) Rating agencies miscalculated the historical risk of traditional fixed-rate residential mortgages. 
B) Investment banks leveraged these mortgage-backed securities more than was allowable under SEC rules. 
C) Lower mortgage lending standards increased the likelihood that defaults would occur. 
D) Investment banks held too much capital relative to these mortgage-backed securities.

Question 16

The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to

Accepted Answer

A) reduce their exposure to risk in the event that the overall mortgage default rate rose. 
B) reduce the amount of capital required to back these bundled securities. 
C) build up large reserves so they would be able to meet their obligations even if the mortgage default rate rose substantially. 
D) quickly access funds to meet short-term debt obligations. 
A) reduce their exposure to risk in the event that the overall mortgage default rate rose. 
B) reduce the amount of capital required to back these bundled securities. 
C) build up large reserves so they would be able to meet their obligations even if the mortgage default rate rose substantially. 
D) quickly access funds to meet short-term debt obligations.

Question 17

Which of the following contributed to the rising mortgage default and foreclosure rates and the eventual economic crisis of 2008?

Accepted Answer

A) tightened mortgage lending standards and the reduction of loanable funds during 2001-2005 
B) the increase in the greed of Wall Street bankers and other commercial lenders 
C) the substantial increase in sub-prime and adjustable rate mortgages as a share of the total during 2001-2006 
D) the increase in the household savings rate during the two decades following 1985 
E) the increase in fixed rate mortgages as a share of the total during the decade prior to the crisis 
A) tightened mortgage lending standards and the reduction of loanable funds during 2001-2005 
B) the increase in the greed of Wall Street bankers and other commercial lenders 
C) the substantial increase in sub-prime and adjustable rate mortgages as a share of the total during 2001-2006 
D) the increase in the household savings rate during the two decades following 1985 
E) the increase in fixed rate mortgages as a share of the total during the decade prior to the crisis

Question 18

The primary objective of the monetary policy of the Fed should be

Accepted Answer

A) low rates of unemployment. 
B) the growth rate of real GDP. 
C) the achievement of price stability. 
D) the regulation of financial institutions. 
A) low rates of unemployment. 
B) the growth rate of real GDP. 
C) the achievement of price stability. 
D) the regulation of financial institutions.

Question 19

Which of the following is true of regulation?

Accepted Answer

A) Regulatory agencies often ignore the secondary effects of their actions and fail to foresee future problems. 
B) Policy-makers are hesitant to call for new regulations even when it is clear they would help avert future crises. 
C) Mortgage lending and banking have historically been unregulated and therefore regulation in these sectors will be unpopular. 
D) Past regulations have been effective at averting crises,but they are unpopular because they reduce the profitability of the regulated industry. 
A) Regulatory agencies often ignore the secondary effects of their actions and fail to foresee future problems. 
B) Policy-makers are hesitant to call for new regulations even when it is clear they would help avert future crises. 
C) Mortgage lending and banking have historically been unregulated and therefore regulation in these sectors will be unpopular. 
D) Past regulations have been effective at averting crises,but they are unpopular because they reduce the profitability of the regulated industry.

Question 20

After new HUD guidelines were issued in 1999,Freddie Mac and Fannie Mae

Accepted Answer

A) extended fewer loans to borrowers making a down payment of 5 percent or less. 
B) extended more loans to borrowers making a down payment of 5 percent or less. 
C) extended new loans only to borrowers making a down payment of at least 20 percent. 
D) refused to extend new loans without full verification that the borrower had prime credit status. 
A) extended fewer loans to borrowers making a down payment of 5 percent or less. 
B) extended more loans to borrowers making a down payment of 5 percent or less. 
C) extended new loans only to borrowers making a down payment of at least 20 percent. 
D) refused to extend new loans without full verification that the borrower had prime credit status.

Exam 33: The Crisis of 2008: Causes and Lessons for the Future

An SEC rule change allowing investment banks to increase the leverage of their investment capital prompted many investment banks to

Are new regulations likely to prevent a future financial crisis?

Which of the following reforms would reduce the likelihood of a future financial crisis?

Interest payments on home mortgages and home equity loans are tax deductible.This tax deductibility encourages households to

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Compared to the 1970s and early 1980s,household debt as a share of income in 2007 has

After a period of price stability in the 1990s,housing prices increased dramatically during 2002-2005 because

Since the mid-1990s,the percentage of new mortgages categorized as sub-prime or Alt-A loans has

When housing prices fell during 2007,the mortgage default rate

The 1995 modifications to the Community Reinvestment Act

Since 1995,federal regulations have

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Fannie Mae and Freddie Mac's dominance of the secondary mortgage market during 1995-2008 encouraged mortgage originators to

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Residential mortgages historically carried a capital requirement of 4 percent.Why did these mortgages,bundled as part of the mortgage-backed securities issued by investment banks,turn out to be far more risky than historically indicated?

The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to

Which of the following contributed to the rising mortgage default and foreclosure rates and the eventual economic crisis of 2008?

The primary objective of the monetary policy of the Fed should be

Which of the following is true of regulation?

After new HUD guidelines were issued in 1999,Freddie Mac and Fannie Mae

The Economic Approach

Asome Tools of the Economist

Asupply,demand,and the Market Process

Asupply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Ataking the Nations Economic Pulse

Economic Fluctuations, unemployment, and Inflation

Aan Introduction to Basic Macroeconomic Markets

Dynamic Change, economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and Historical Perspective

Fiscal Policy, incentives, and Secondary Effects

Amoney and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, output, and Employment

Creating an Environment for Growth and Prosperity

Institutions,policies,and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Consumer Choice and Elasticity

Acosts and the Supply of Goods

Aprice Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Aprice-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Government Spending and Taxation

The Economics of Social Security

The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Great Debates in Economics: Keynes Versus Hayek

Lessons From the Great Depression

Lessons From Japan and Canada

The Federal Budget and the National Debt

The Economics of Healthcare

Education: Problems and Performance

Earnings Differences Between Men and Women

Do Labor Unions Increase the Wages of Workers

The Question of Resource Exhaustion

Difficult Environmental Cases and the Role of Government

Filters