Question 1

The chartering process is especially designed to deal with the ________ problem,and regular bank examinations help to reduce the ________ problem.

Accepted Answer

A) adverse selection; adverse selection 
B) adverse selection; moral hazard 
C) moral hazard; adverse selection 
D) moral hazard; moral hazard 
A) adverse selection; adverse selection 
B) adverse selection; moral hazard 
C) moral hazard; adverse selection 
D) moral hazard; moral hazard

Question 2

As in the United States,an important factor in the banking crises in Latin America 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 3

The bailout of the savings and loan industry was much delayed and,therefore,much more costly to taxpayers because

Accepted Answer

A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. 
B) politicians listened to the taxpayers rather than the S&L lobbyists. 
C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. 
D) regulators could not be fired,therefore,they didn't care if they did a good job or not. 
A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. 
B) politicians listened to the taxpayers rather than the S&L lobbyists. 
C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. 
D) regulators could not be fired,therefore,they didn't care if they did a good job or not.

Question 4

Banks will be examined at least once a year and given a CAMELS rating by examiners.The L stands for ________.

Accepted Answer

A) liabilities 
B) liquidity 
C) loans 
D) leverage 
A) liabilities 
B) liquidity 
C) loans 
D) leverage

Question 5

The too-big-to-fail policy

Accepted Answer

A) reduces moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) allows small banks to take on more risk than large banks. 
A) reduces moral hazard problems. 
B) puts large banks at a competitive disadvantage in attracting large deposits. 
C) treats large depositors of small banks inequitably when compared to depositors of large banks. 
D) allows small banks to take on more risk than large banks.

Question 6

The major provisions of the Competitive Equality Banking Act of 1987 include

Accepted Answer

A) expanding the responsibilities of the FDIC,which is now the sole administrator of the federal deposit insurance system. 
B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. 
D) prompt corrective action when a bank gets in trouble. 
A) expanding the responsibilities of the FDIC,which is now the sole administrator of the federal deposit insurance system. 
B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. 
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. 
D) prompt corrective action when a bank gets in trouble.

Question 7

The Argentine banking crisis of 2001 resulted from Argentina's banks being required to

Accepted Answer

A) purchase large amounts of government debt. 
B) pay back the value of failed loans. 
C) make risky real estate loans. 
D) make loans to only state-owned businesses. 
A) purchase large amounts of government debt. 
B) pay back the value of failed loans. 
C) make risky real estate loans. 
D) make loans to only state-owned businesses.

Question 8

During the boom years of the 1920s,bank failures were quite

Accepted Answer

A) uncommon,averaging less than 30 per year. 
B) uncommon,averaging less than 100 per year. 
C) common,averaging about 600 per year. 
D) common,averaging about 1000 per year. 
A) uncommon,averaging less than 30 per year. 
B) uncommon,averaging less than 100 per year. 
C) common,averaging about 600 per year. 
D) common,averaging about 1000 per year.

Question 9

Consumer protection legislation includes legislation to

Accepted Answer

A) reduce discrimination in credit markets. 
B) require banks to make loans to everyone who applies. 
C) reduce the amount of interest that bank's can charge on loans. 
D) require banks to make periodic reports to the Better Business Bureau. 
A) reduce discrimination in credit markets. 
B) require banks to make loans to everyone who applies. 
C) reduce the amount of interest that bank's can charge on loans. 
D) require banks to make periodic reports to the Better Business Bureau.

Question 10

The subprime financial crisis showed the need for increased financial regulation,however,too much or poorly designed regulation could

Accepted Answer

A) choke off financial innovation. 
B) increase the efficiency of the financial system. 
C) increase economic growth. 
D) increase international financial integration. 
A) choke off financial innovation. 
B) increase the efficiency of the financial system. 
C) increase economic growth. 
D) increase international financial integration.

Question 11

When bad drivers line up to purchase collision insurance,automobile insurers are subject to the

Accepted Answer

A) moral hazard problem. 
B) adverse selection problem. 
C) assigned risk problem. 
D) ill queue problem. 
A) moral hazard problem. 
B) adverse selection problem. 
C) assigned risk problem. 
D) ill queue problem.

Question 12

The ________ that required separation of commercial and investment banking was repealed in 1999.

Accepted Answer

A) the Federal Reserve Act. 
B) the Glass-Steagall Act. 
C) the Bank Holding Company Act. 
D) the Monetary Control Act. 
A) the Federal Reserve Act. 
B) the Glass-Steagall Act. 
C) the Bank Holding Company Act. 
D) the Monetary Control Act.

Question 13

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 14

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

Accepted Answer

A) that the FDIC guarantees all deposits when it uses the "payoff" method. 
B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. 
C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions. 
A) that the FDIC guarantees all deposits when it uses the "payoff" method. 
B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. 
C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. 
D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

Question 15

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

Accepted Answer

A) more; more 
B) more; less 
C) less; more 
D) less; less 
A) more; more 
B) more; less 
C) less; more 
D) less; less

Question 16

"Bureaucratic gambling" refers to

Accepted Answer

A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds. 
A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. 
B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. 
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. 
D) the risk that regulators took in going to Congress to ask for additional funds.

Question 17

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called

Accepted Answer

A) disclosure requirements. 
B) efficient market requirements. 
C) asset restrictions. 
D) capital requirements. 
A) disclosure requirements. 
B) efficient market requirements. 
C) asset restrictions. 
D) capital requirements.

Question 18

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 19

Since depositors,like any lender,only receive fixed payments while the bank keeps any surplus profits,they face the ________ problem that banks may take on too ________ risk.

Accepted Answer

A) adverse selection; little 
B) adverse selection; much 
C) moral hazard; little 
D) moral hazard; much 
A) adverse selection; little 
B) adverse selection; much 
C) moral hazard; little 
D) moral hazard; much

Question 20

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

Accepted Answer

A) last-in,first-out constraint. 
B) sequential service constraint. 
C) double-coincidence of wants constraint. 
D) everyone-shares-equally constraint. 
A) last-in,first-out constraint. 
B) sequential service constraint. 
C) double-coincidence of wants constraint. 
D) everyone-shares-equally constraint.

Exam 11: Economic Analysis of Financial Regulation

The chartering process is especially designed to deal with the ________ problem,and regular bank examinations help to reduce the ________ problem.

As in the United States,an important factor in the banking crises in Latin America was the

The bailout of the savings and loan industry was much delayed and,therefore,much more costly to taxpayers because

Banks will be examined at least once a year and given a CAMELS rating by examiners.The L stands for ________.

The too-big-to-fail policy

The major provisions of the Competitive Equality Banking Act of 1987 include

The Argentine banking crisis of 2001 resulted from Argentina's banks being required to

During the boom years of the 1920s,bank failures were quite

Consumer protection legislation includes legislation to

The subprime financial crisis showed the need for increased financial regulation,however,too much or poorly designed regulation could

When bad drivers line up to purchase collision insurance,automobile insurers are subject to the

The ________ that required separation of commercial and investment banking was repealed in 1999.

The evidence from banking crises in other countries indicates that

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

"Bureaucratic gambling" refers to

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called

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

Since depositors,like any lender,only receive fixed payments while the bank keeps any surplus profits,they face the ________ problem that banks may take on too ________ risk.

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

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 chartering process is especially designed to deal with the problem,and regular bank examinations help to reduce the problem.

A well-capitalized financial institution has to lose if it fails and thus is likely to pursue risky activities.

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

Since depositors,like any lender,only receive fixed payments while the bank keeps any surplus profits,they face the problem that banks may take on too risk.