Question 1

The directive of prompt corrective action means that

Accepted Answer

A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. 
B) the banks must take actions quickly to resolve reserve disputes. 
C) bank failures cannot occur. 
D) there must be an immediate response to an increase in interest rates. 
A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. 
B) the banks must take actions quickly to resolve reserve disputes. 
C) bank failures cannot occur. 
D) there must be an immediate response to an increase in interest rates.

Question 2

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 3

Depositors lack of information about the quality of bank assets can lead to ________.

Accepted Answer

A) bank panics 
B) bank booms 
C) sequencing 
D) asset transformation 
A) bank panics 
B) bank booms 
C) sequencing 
D) asset transformation

Question 4

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is know as

Accepted Answer

A) competition in laxity. 
B) depositor supervision. 
C) regulatory arbitrage. 
D) a dual banking system. 
A) competition in laxity. 
B) depositor supervision. 
C) regulatory arbitrage. 
D) a dual banking system.

Question 5

A system of deposit insurance

Accepted Answer

A) attracts risk-taking entrepreneurs into the banking industry. 
B) encourages bank managers to decrease risk. 
C) increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. 
D) increases the likelihood of bank runs. 
A) attracts risk-taking entrepreneurs into the banking industry. 
B) encourages bank managers to decrease risk. 
C) increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. 
D) increases the likelihood of bank runs.

Question 6

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 7

Regulatory forbearance

Accepted Answer

A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls",as insolvent institutions lost deposits to health institutions. 
C) had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability,saving the FSLIC billions of dollars. 
D) increased adverse selection dramatically. 
A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. 
B) had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls",as insolvent institutions lost deposits to health institutions. 
C) had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability,saving the FSLIC billions of dollars. 
D) increased adverse selection dramatically.

Question 8

The leverage ratio is the ratio of a bank's

Accepted Answer

A) assets divided by its liabilities. 
B) income divided by its assets. 
C) capital divided by its total assets. 
D) capital divided by its total liabilities. 
A) assets divided by its liabilities. 
B) income divided by its assets. 
C) capital divided by its total assets. 
D) capital divided by its total liabilities.

Question 9

Moral hazard problems increased in prominence in the 1980s

Accepted Answer

A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation. 
A) as deregulation required savings and loans and mutual savings banks to be more cautious. 
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking. 
C) following a decrease in federal deposit insurance from $100,000 to $40,000. 
D) as interest rates were sharply decreased to bring down inflation.

Question 10

Deposit insurance is only one type of government safety net.All of the following are types of government support for troubled financial institutions except

Accepted Answer

A) forgiving tax debt. 
B) lending from the central bank. 
C) lending directly from the government's treasury department. 
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full. 
A) forgiving tax debt. 
B) lending from the central bank. 
C) lending directly from the government's treasury department. 
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full.

Question 11

The government safety net creates both an adverse selection problem and a moral hazard problem.Explain.

Accepted Answer

The adverse selection problem occurs bec

Question 12

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

Accepted Answer

A) 8%. 
B) 5% 
C) 10% 
D) 25% 
A) 8%. 
B) 5% 
C) 10% 
D) 25%

Question 13

The Depository Institutions Deregulation and Monetary Control Act of 1980

Accepted Answer

A) separated investment banks and commercial banks. 
B) restricted the use of ATS accounts. 
C) imposed restrictive usury ceilings on large agricultural loans. 
D) increased deposit insurance from $40,000 to $100,000. 
A) separated investment banks and commercial banks. 
B) restricted the use of ATS accounts. 
C) imposed restrictive usury ceilings on large agricultural loans. 
D) increased deposit insurance from $40,000 to $100,000.

Question 14

The federal agencies that examine banks include

Accepted Answer

A) the Federal Reserve System. 
B) the Internal Revenue Service. 
C) the SEC. 
D) the U.S.Treasury. 
A) the Federal Reserve System. 
B) the Internal Revenue Service. 
C) the SEC. 
D) the U.S.Treasury.

Question 15

The Basel Accord,an international agreement,requires banks to hold capital based on

Accepted Answer

A) risk-weighted assets. 
B) the total value of assets. 
C) liabilities. 
D) deposits. 
A) risk-weighted assets. 
B) the total value of assets. 
C) liabilities. 
D) deposits.

Question 16

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

Question 17

Taxpayers were served poorly by thrift regulators in the 1980s.This poor performance cannot be explained by

Accepted Answer

A) regulators' desire to escape blame for poor performance,leading to a perverse strategy of "bureaucratic gambling." 
B) regulators' incentives to accede to pressures imposed by politicians,who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. 
C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans. 
D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers. 
A) regulators' desire to escape blame for poor performance,leading to a perverse strategy of "bureaucratic gambling." 
B) regulators' incentives to accede to pressures imposed by politicians,who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. 
C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans. 
D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers.

Question 18

Currently,Fannie Mae and Freddie Mac are

Accepted Answer

A) privately owned government-sponsored enterprises. 
B) privately owned enterprises with no government sponsorship. 
C) government agencies. 
D) government departments. 
A) privately owned government-sponsored enterprises. 
B) privately owned enterprises with no government sponsorship. 
C) government agencies. 
D) government departments.

Question 19

The Federal Home Loan Bank Board and the FSLIC,both of which failed in their regulatory tasks,were abolished by the

Accepted Answer

A) Competitive Equality Banking Act of 1987. 
B) Financial Institutions Reform,Recovery and Enforcement Act of 1989. 
C) Office of Thrift Supervision. 
D) Office of the Comptroller of the Currency. 
A) Competitive Equality Banking Act of 1987. 
B) Financial Institutions Reform,Recovery and Enforcement Act of 1989. 
C) Office of Thrift Supervision. 
D) Office of the Comptroller of the Currency.

Question 20

To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.

Accepted Answer

A) FDIC 
B) SEC 
C) Federal Reserve 
D) ATM 
A) FDIC 
B) SEC 
C) Federal Reserve 
D) ATM

Exam 11: Economic Analysis of Financial Regulation

The directive of prompt corrective action means that

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

Depositors lack of information about the quality of bank assets can lead to ________.

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is know as

A system of deposit insurance

Competition between banks

Regulatory forbearance

The leverage ratio is the ratio of a bank's

Moral hazard problems increased in prominence in the 1980s

Deposit insurance is only one type of government safety net.All of the following are types of government support for troubled financial institutions except

The government safety net creates both an adverse selection problem and a moral hazard problem.Explain.

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

The Depository Institutions Deregulation and Monetary Control Act of 1980

The federal agencies that examine banks include

The Basel Accord,an international agreement,requires banks to hold capital based on

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

Taxpayers were served poorly by thrift regulators in the 1980s.This poor performance cannot be explained by

Currently,Fannie Mae and Freddie Mac are

The Federal Home Loan Bank Board and the FSLIC,both of which failed in their regulatory tasks,were abolished by the

To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.

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 and the Subprime Meltdown

Banking and the Management of Financial Institutions

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

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