Question 1

Which sequence of events correctly and sequentially best describes financial sector problems spilling over to the real sector of the economy?

Accepted Answer

A) Bank assets increase,capital increases,consumers purchase less,firms lay-off workers. 
B) Bank liabilities increase,capital decreases,consumers purchase more of the "wrong" products,firms lay-off some workers and hire other workers. 
C) Bank assets decline in value,banks approach insolvency,banks cut back on lending,consumers purchase less,some firms produce less and other firms go out of business. 
D) Banks engage in regulatory capital arbitrage,leverage ratios are rising,asset values are rising,consumers purchase less,producers produce less,firms lay-off some workers. 
E) none of the above 
A) Bank assets increase,capital increases,consumers purchase less,firms lay-off workers. 
B) Bank liabilities increase,capital decreases,consumers purchase more of the "wrong" products,firms lay-off some workers and hire other workers. 
C) Bank assets decline in value,banks approach insolvency,banks cut back on lending,consumers purchase less,some firms produce less and other firms go out of business. 
D) Banks engage in regulatory capital arbitrage,leverage ratios are rising,asset values are rising,consumers purchase less,producers produce less,firms lay-off some workers. 
E) none of the above C

Question 2

A ____________________ loan is a nontraditional mortgage loan granted to persons who have some factor,such as low credit ratings,which suggest that they could default on the repayment of their debt.

Accepted Answer

A) mortgage-backed security 
B) collateralized 
C) subprime mortgage 
D) risk-based mortgage 
A) mortgage-backed security 
B) collateralized 
C) subprime mortgage 
D) risk-based mortgage C

Question 3

A bank has $390 million in assets and $330 million in liabilities.The bank's net worth is _____________ million and its leverage ratio is __________________.

Accepted Answer

A) $360;1.08 to 1 
B) $60;0.15 to 1 
C) $40;3.75 to 1 
D) $60;6.5 to 1 
A) $360;1.08 to 1 
B) $60;0.15 to 1 
C) $40;3.75 to 1 
D) $60;6.5 to 1 D

Question 4

There are some economists who argue that low mortgage interest rates in the time period preceeding the financial crisis of 2007-2009 were a result of a ___________ in global savings.They argue that emerging countries began to save ___________ which helped to _____________ the supply of loanable funds in the United States.

Accepted Answer

A) glut;less;decrease 
B) glut;more;increase 
C) decline;more;increase 
D) decline;less;decrease 
A) glut;less;decrease 
B) glut;more;increase 
C) decline;more;increase 
D) decline;less;decrease

Question 5

According to Alan Greenspan,the type of inflation that the Taylor Rule is best at addressing is

Accepted Answer

A) asset-price inflation 
B) product-price inflation 
C) both asset-price and product-price inflation 
D) demand-induced-one-shot inflation 
E) supply-induced one-shot inflation 
A) asset-price inflation 
B) product-price inflation 
C) both asset-price and product-price inflation 
D) demand-induced-one-shot inflation 
E) supply-induced one-shot inflation

Question 6

In the early 2000s,banks lowered lending standards to comply with the Community Reinvestment Act.

Accepted Answer

A) True 
 B)False

Question 7

In the early 2000s,Fannie Mae and Freddie Mac came under political pressure to buy nontraditional loans.

Accepted Answer

A) True 
 B)False

Question 8

If the value of a bank's assets is rising,a high leverage ratio increases the percentage rise in its capital.

Accepted Answer

A) True 
 B)False

Question 9

If nominal GDP is declining,it is necessarily true that Real GDP is also declining.

Accepted Answer

A) True 
 B)False

Question 10

Securitization is the process by which financial institutions

Accepted Answer

A) pool together a group of loans and then issue securities backed by the pool. 
B) determine the composition of their assets that will yield the optimal amount of security for their financial health. 
C) borrow funds from the Federal Reserve and then use those funds to make loans to their customers. 
D) determine sub-prime mortgage rates. 
A) pool together a group of loans and then issue securities backed by the pool. 
B) determine the composition of their assets that will yield the optimal amount of security for their financial health. 
C) borrow funds from the Federal Reserve and then use those funds to make loans to their customers. 
D) determine sub-prime mortgage rates.

Question 11

Describe how,according to some economists,the Fed's actions and the"global savings glut" both contributed to rising U.S.housing prices in the early 2000s.

Accepted Answer

There are some economists who argue that

Question 12

For financial institutions,securitization is the means by which regulatory capital arbitrage lowers capital requirements.

Accepted Answer

A) True 
 B)False

Question 13

Suppose that a bank has $500 million in asset X,$400 million in asset Y,and $200 million in asset Z.Each asset has a different risk weight.The risk weight for asset X is 40%,the risk weight for asset Y is 70%,and asset Z has zero risk.The amount of risk-weighted assets for this bank is ____________ million.Assuming that the bank has to hold capital equal to 8% of its risk-weighted assets,the bank must hold _____________ million in capital.

Accepted Answer

A) $480;$38.4 
B) $1,100;$88 
C) $1,100;$880 
D) $340;$27.2 
A) $480;$38.4 
B) $1,100;$88 
C) $1,100;$880 
D) $340;$27.2

Question 14

According to economist John Taylor,the Fed set its federal funds rate target too high during the period 2002-early 2006,which contributed to the financial crisis of 2007-2009.

Accepted Answer

A) True 
 B)False

Question 15

In February 2009,Congress passed (and President Obama signed)a $787 billion fiscal stimulus bill in an attempt to improve the economy.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is more nearly consistent with a global savings glut?

Accepted Answer

A) high interest rates and the global savings-World GDP ratio is low 
B) low interest rates and the global savings-World GDP ratio is low 
C) high interest rates and the global savings-World GDP ratio is high 
D) low interest rates and the global savings-World GDP ratio is high 
E) none of the above 
A) high interest rates and the global savings-World GDP ratio is low 
B) low interest rates and the global savings-World GDP ratio is low 
C) high interest rates and the global savings-World GDP ratio is high 
D) low interest rates and the global savings-World GDP ratio is high 
E) none of the above

Question 17

__________________ capital specifies the amount of capital financial institutions should hold based on the riskiness of their assets.

Accepted Answer

A) Regulatory 
B) Securitization-based 
C) Risk-based 
D) Leverage-based 
A) Regulatory 
B) Securitization-based 
C) Risk-based 
D) Leverage-based

Question 18

Describe three of the ways that the U.S.federal government responded to the financial crisis of 2007-2009 and to the resulting problems in the real sector of the economy.Be sure to include in your answer the government's specific intent in each of these actions.

Accepted Answer

The federal government responses can gen

Question 19

According to John Taylor (for whom the Taylor rule is named),during the period 2002-early 2006 actual Fed policy was "too_________" ,which he believes led to both interest rates being "too ________" and rising housing prices in the United States.

Accepted Answer

A) contractionary;high 
B) contractionary;low 
C) expansionary;low 
D) expansionary;high 
A) contractionary;high 
B) contractionary;low 
C) expansionary;low 
D) expansionary;high

Question 20

Describe the differences between traditional and nontraditional lending practices.Under which category do subprime loans belong?

Accepted Answer

In traditional lending,borrowers must pr

Exam 18: The Financial Crisis of 2007-2009

Which sequence of events correctly and sequentially best describes financial sector problems spilling over to the real sector of the economy?

A ____________________ loan is a nontraditional mortgage loan granted to persons who have some factor,such as low credit ratings,which suggest that they could default on the repayment of their debt.

A bank has $390 million in assets and $330 million in liabilities.The bank's net worth is _____________ million and its leverage ratio is __________________.

According to Alan Greenspan,the type of inflation that the Taylor Rule is best at addressing is

In the early 2000s,banks lowered lending standards to comply with the Community Reinvestment Act.

In the early 2000s,Fannie Mae and Freddie Mac came under political pressure to buy nontraditional loans.

If the value of a bank's assets is rising,a high leverage ratio increases the percentage rise in its capital.

If nominal GDP is declining,it is necessarily true that Real GDP is also declining.

Securitization is the process by which financial institutions

Describe how,according to some economists,the Fed's actions and the"global savings glut" both contributed to rising U.S.housing prices in the early 2000s.

For financial institutions,securitization is the means by which regulatory capital arbitrage lowers capital requirements.

According to economist John Taylor,the Fed set its federal funds rate target too high during the period 2002-early 2006,which contributed to the financial crisis of 2007-2009.

In February 2009,Congress passed (and President Obama signed)a $787 billion fiscal stimulus bill in an attempt to improve the economy.

Which of the following is more nearly consistent with a global savings glut?

__________________ capital specifies the amount of capital financial institutions should hold based on the riskiness of their assets.

Describe three of the ways that the U.S.federal government responded to the financial crisis of 2007-2009 and to the resulting problems in the real sector of the economy.Be sure to include in your answer the government's specific intent in each of these actions.

According to John Taylor (for whom the Taylor rule is named),during the period 2002-early 2006 actual Fed policy was "too_________" ,which he believes led to both interest rates being "too ________" and rising housing prices in the United States.

Describe the differences between traditional and nontraditional lending practices.Under which category do subprime loans belong?

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, controlled, and Relative

Supply,demand,and Price: Applications

Macroeconomic Measurements, part I: Prices and Unemployment

Macroeconomic Measurements, part II: GDP and Real GDP

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self-Regulating Economy

Keynesian Macroeconomics and Economic Instability: a Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money,banking,and the Financial System

The Federal Reserve System

Money and the Economy

Monetary Policy

Expectations Theory and the Economy

Economic Growth: Resources, technology, ideas, and Institutions

Debates in Macroeconomics Over the Role and Effects of Government

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case for and Against Government: Five Topics Considered

Stocks, bonds, futures, and Options

Filters

A bank has $390 million in assets and $330 million in liabilities.The bank's net worth is _ million and its leverage ratio is ______.

According to John Taylor (for whom the Taylor rule is named),during the period 2002-early 2006 actual Fed policy was "too_" ,which he believes led to both interest rates being "too " and rising housing prices in the United States.