Question 1

A bank failure is less likely to occur when

Accepted Answer

A)  a bank holds less U.S. government securities. 
B)  a bank suffers large deposit outflows. 
C)  a bank holds fewer excess reserves. 
D)  a bank has more bank capital. 
A)  a bank holds less U.S. government securities. 
B)  a bank suffers large deposit outflows. 
C)  a bank holds fewer excess reserves. 
D)  a bank has more bank capital.

Question 2

The contagion effect refers to the fact that

Accepted Answer

A)  deposit insurance has eliminated the problem of bank failures. 
B)  bank runs involve only sound banks. 
C)  bank runs involve only insolvent banks. 
D)  the failure of one bank can hasten the failure of other banks. 
A)  deposit insurance has eliminated the problem of bank failures. 
B)  bank runs involve only sound banks. 
C)  bank runs involve only insolvent banks. 
D)  the failure of one bank can hasten the failure of other banks.

Question 3

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

Accepted Answer

A)  state 
B)  domestic investor 
C)  depositor 
D)  domestic corporate 
A)  state 
B)  domestic investor 
C)  depositor 
D)  domestic corporate

Question 4

The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

Accepted Answer

A)  politicians/regulators; taxpayers 
B)  taxpayers; politician/regulators 
C)  taxpayers; bank managers 
D)  bank managers; politicians/regulators 
A)  politicians/regulators; taxpayers 
B)  taxpayers; politician/regulators 
C)  taxpayers; bank managers 
D)  bank managers; politicians/regulators

Question 5

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

Accepted Answer

A)  regulation. 
B)  ownership. 
C)  recall. 
D)  forbearance. 
A)  regulation. 
B)  ownership. 
C)  recall. 
D)  forbearance.

Question 6

The evidence from banking crises in other countries indicates that

Accepted Answer

A)  deposit insurance is to blame in each country. 
B)  a government safety net for depositors need not increase moral hazard. 
C)  regulatory forbearance never leads to problems. 
D)  deregulation combined with poor regulatory supervision raises moral hazard incentives. 
A)  deposit insurance is to blame in each country. 
B)  a government safety net for depositors need not increase moral hazard. 
C)  regulatory forbearance never leads to problems. 
D)  deregulation combined with poor regulatory supervision raises moral hazard incentives.

Question 7

As in the United States,an important factor in the banking crises in Norway,Sweden,and Finland was the

Accepted Answer

A)  financial liberalization that occurred in the 1980s. 
B)  decline in real interest rates that occurred in the 1980s. 
C)  high inflation that occurred in the 1980s. 
D)  sluggish economic growth that occurred in the 1980s. 
A)  financial liberalization that occurred in the 1980s. 
B)  decline in real interest rates that occurred in the 1980s. 
C)  high inflation that occurred in the 1980s. 
D)  sluggish economic growth that occurred in the 1980s.

Question 8

Banks engage in regulatory arbitrage by

Accepted Answer

A)  keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B)  keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C)  hiding risky assets from regulators. 
D)  buying risky assets from arbitragers. 
A)  keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. 
B)  keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. 
C)  hiding risky assets from regulators. 
D)  buying risky assets from arbitragers.

Question 9

Regulators attempt to reduce the riskiness of banks' asset portfolios by

Accepted Answer

A)  limiting the amount of loans in particular categories or to individual borrowers. 
B)  encouraging banks to hold risky assets such as common stocks. 
C)  establishing a minimum interest rate floor that banks can earn on certain assets. 
D)  requiring collateral for all loans. 
A)  limiting the amount of loans in particular categories or to individual borrowers. 
B)  encouraging banks to hold risky assets such as common stocks. 
C)  establishing a minimum interest rate floor that banks can earn on certain assets. 
D)  requiring collateral for all loans.

Question 10

Competition between banks

Accepted Answer

A)  encourages greater risk taking. 
B)  encourages conservative bank management. 
C)  increases bank profitability. 
D)  eliminates the need for government regulation. 
A)  encourages greater risk taking. 
B)  encourages conservative bank management. 
C)  increases bank profitability. 
D)  eliminates the need for government regulation.

Question 11

An important factor in producing the subprime mortgage crisis was

Accepted Answer

A)  lax consumer protection regulation. 
B)  onerous rules placed on mortgage originators. 
C)  weak incentives for mortgage brokers to use complicated mortgage products. 
D)  strong incentives for the mortgage brokers to verify income information. 
A)  lax consumer protection regulation. 
B)  onerous rules placed on mortgage originators. 
C)  weak incentives for mortgage brokers to use complicated mortgage products. 
D)  strong incentives for the mortgage brokers to verify income information.

Question 12

The fact that banks operate on a "sequential service constraint" means that

Accepted Answer

A)  all depositors share equally in the bank's funds during a crisis. 
B)  depositors arriving last are just as likely to receive their funds as those arriving first. 
C)  depositors arriving first have the best chance of withdrawing their funds. 
D)  banks randomly select the depositors who will receive all of their funds. 
A)  all depositors share equally in the bank's funds during a crisis. 
B)  depositors arriving last are just as likely to receive their funds as those arriving first. 
C)  depositors arriving first have the best chance of withdrawing their funds. 
D)  banks randomly select the depositors who will receive all of their funds.

Question 13

If the FDIC decides that a bank is too big to fail,it will use the ________ method,effectively ensuring that ________ depositors will suffer losses.

Accepted Answer

A)  payoff; large 
B)  payoff; no 
C)  purchase and assumption; large 
D)  purchase and assumption; no 
A)  payoff; large 
B)  payoff; no 
C)  purchase and assumption; large 
D)  purchase and assumption; no

Question 14

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance

Accepted Answer

A)  are likely to take on greater risks than they otherwise would. 
B)  are likely to be too conservative, reducing the probability of turning a profit. 
C)  are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. 
D)  are placed at a competitive disadvantage in acquiring funds. 
A)  are likely to take on greater risks than they otherwise would. 
B)  are likely to be too conservative, reducing the probability of turning a profit. 
C)  are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. 
D)  are placed at a competitive disadvantage in acquiring funds.

Question 15

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of

Accepted Answer

A)  regulatory forbearance. 
B)  regulatory kindness. 
C)  ostrich reasoning. 
D)  ignorance reasoning. 
A)  regulatory forbearance. 
B)  regulatory kindness. 
C)  ostrich reasoning. 
D)  ignorance reasoning.

Question 16

Microprudential supervision does all of the following except

Accepted Answer

A)  checking capital ratios of a bank. 
B)  checking a bank's compliance with disclosure requirements. 
C)  assessing the riskiness of an individual bank's activities. 
D)  focusing on financial system liquidity. 
A)  checking capital ratios of a bank. 
B)  checking a bank's compliance with disclosure requirements. 
C)  assessing the riskiness of an individual bank's activities. 
D)  focusing on financial system liquidity.

Question 17

Federal deposit insurance covers deposits up to $250,000,but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system.When the FDIC does this,it uses the

Accepted Answer

A)  "payoff" method. 
B)  "purchase and assumption" method. 
C)  "inequity" method. 
D)  "Basel" method. 
A)  "payoff" method. 
B)  "purchase and assumption" method. 
C)  "inequity" method. 
D)  "Basel" method.

Question 18

Off-balance-sheet activities

Accepted Answer

A)  generate fee income with no increase in risk. 
B)  increase bank risk but do not increase income. 
C)  generate fee income but increase a bank's risk. 
D)  generate fee income and reduce risk. 
A)  generate fee income with no increase in risk. 
B)  increase bank risk but do not increase income. 
C)  generate fee income but increase a bank's risk. 
D)  generate fee income and reduce risk.

Question 19

In order to ensure that borrowers have an ability to repay residential mortgages,the new consumer protection legislation requires lenders to do all of the following except

Accepted Answer

A)  verify the income of the borrower. 
B)  verify the borrower's job status. 
C)  check the credit history of the borrower. 
D)  verify that the borrower can read and understand a loan contract. 
A)  verify the income of the borrower. 
B)  verify the borrower's job status. 
C)  check the credit history of the borrower. 
D)  verify that the borrower can read and understand a loan contract.

Question 20

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Accepted Answer

A)  regulatory forbearance; moral hazard 
B)  regulatory forbearance; adverse hazard 
C)  regulatory agnosticism; moral hazard 
D)  regulatory agnosticism; adverse hazard 
A)  regulatory forbearance; moral hazard 
B)  regulatory forbearance; adverse hazard 
C)  regulatory agnosticism; moral hazard 
D)  regulatory agnosticism; adverse hazard

Exam 11: Economic Analysis of Financial Regulation

A bank failure is less likely to occur when

The contagion effect refers to the fact that

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case,the ________,did not have the same incentive to minimize cost to the economy as the principals,the ________.

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

The evidence from banking crises in other countries indicates that

As in the United States,an important factor in the banking crises in Norway,Sweden,and Finland was the

Banks engage in regulatory arbitrage by

Regulators attempt to reduce the riskiness of banks' asset portfolios by

Competition between banks

An important factor in producing the subprime mortgage crisis was

The fact that banks operate on a "sequential service constraint" means that

If the FDIC decides that a bank is too big to fail,it will use the ________ method,effectively ensuring that ________ depositors will suffer losses.

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance

When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them,they were pursuing a policy of

Microprudential supervision does all of the following except

Federal deposit insurance covers deposits up to $250,000,but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system.When the FDIC does this,it uses the

Off-balance-sheet activities

In order to ensure that borrowers have an ability to repay residential mortgages,the new consumer protection legislation requires lenders to do all of the following except

The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case,the ,did not have the same incentive to minimize cost to the economy as the principals,the .

If the FDIC decides that a bank is too big to fail,it will use the method,effectively ensuring that depositors will suffer losses.

The policy of exacerbated problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.