Deck 9: The Crisis

Question 1

The mortgage is said to be underwater when

A)the value of the house exceeds the value of the mortgage.
B)the house is flooded.
C)the value of the mortgage exceeds the value of the house.
D)none of the above

Answer 1

C

Question 2

Suppose bank A has assets of 100,liabilities of 60,and capital of 40.Its capital ratio is

A)40%.
B)66%.
C)25%.
D)60%.

Answer 2

A

Question 3

Suppose bank A has assets of 100,liabilities of 80,and capital of 20.Its leverage ratio is

A)4.
B)5.
C)10.
D)9.

Answer 3

B

Question 4

LIBOR rate is

A)interbank loan rate.
B)the riskless rate.
C)TED spread.
D)discount rate.

Question 5

________ was introduced in October 2008 to clean up banks.

A)liquidity facilities
B)wholesale funding
C)TARP
D)fire sale

Question 6

Suppose bank A has assets of 100,liabilities of 80,and capital of 20.Its capital ratio is

A)20%.
B)25%.
C)11%.
D)10%.

Question 7

American Recovery and Reinvestment Act 2009 calls for

A)both tax reductions and government spending reductions.
B)both tax reductions and government spending increases.
C)both tax increases and government spending increases.
D)both tax increases and government spending reductions.

Question 8

FDIC deposit insurance is ________ per account.

A)$100,000
B)$150,000
C)$200,000
D)$250,000

Question 9

By 2006,about ________ of all U.S mortgages were subprimes.

A)10%
B)20%
C)30%
D)25%

Question 10

Suppose bank A has assets of 100,liabilities of 60,and capital of 40.Its leverage ratio is

A)1.5.
B)2.5.
C)0.6.
D)0.4.

Question 11

In mid-2008,estimated losses on mortgages were estimated to be about ________ of U.S.GDP.

A)2%
B)5%
C)7%
D)9%

Question 12

The first structured investment vehicle (SIV)was set up by ________ in 1988.

A)J.P.Morgan
B)Chase
C)Citigroup
D)Goldman Sachs

Question 13

The Case-Shiller index reached its peak in

A)2006.
B)2007.
C)2005.
D)2008.

Question 14

AIG provide CDS against

A)insolvency.
B)default risk.
C)illiquidity.
D)none of the above

Question 15

Securitization can NOT help financial intermediaries

A)diversify their portfolios.
B)avoid bankruptcy.
C)attract more investors to buy and hold their securities.
D)decrease the cost of borrowing.

Question 16

Firms with _____ratings are considered the safest.

A)AAA
B)BBB
C)CCC
D)BB

Question 17

Collaterailzed debt obligations (CDOs)were first issued in

A)1980s.
B)1990s.
C)2000.
D)2001.

Question 18

Which of the followings is NOT a bank's assets?

A)reserves
B)loans
C)government bonds
D)checkable deposits

Question 19

The Case-Shiller index is normalized to equal 100 in January

A)1999.
B)1990.
C)2000.
D)2001.

Question 20

Ted spread is

A)the difference between the riskless rate and the rate at which banks are willing to lend to each other.
B)the difference between the riskless rate and the yield on corporate bonds.
C)the difference between the riskless rate and return on stocks.
D)none of the above

Question 21

An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

A)the interest rate will decrease.
B)the interest rate will not change.
C)output will increase.
D)the money supply,M,will not change.
E)none of the above

Question 22

First,explain leverage ratio.Second,discuss why banks had high leverage ratio.

Question 23

Was the sharp house price increase from 2000 to 2006 justified?

Question 24

The reduction in Japanese stock prices in the 1990s was most likely the result of which of the following?

A)contractionary monetary policy
B)contractionary fiscal policy
C)the end of a speculative bubble
D)an increase in inflation

Question 25

One of the possible solutions for the Japanese slump is to

A)implement macroeconomic policies to create inflation.
B)maintain a constant aggregate price level.
C)maintain the real interest rate at its original level.
D)none of the above

Question 26

Which of the following has been suggested as a possible solution to the Japanese slump?

A)disinflationary macroeconomic policy
B)budget deficit reduction packages
C)banking reform
D)all of the above
E)none of the above

Question 27

Suppose a liquidity trap exists.Graphically illustrate and explain the effects of an increase in money supply using the IS-LM model.

Question 28

When a liquidity trap situation exists,we know that

A)an open market operation will have no effect on the supply of money.
B)an open market operation will have no effect on the monetary base.
C)fiscal policy will have no effect on the demand for goods.
D)expansionary monetary policy will be deflationary.
E)none of the above

Question 29

Capital can help prevent banks from bankruptcy.Explain why things can still go wrong even if a banks holds some capital.

Question 30

Which of the following will occur when an economy is faced with a liquidity trap situation?

A)a reduction in the price level will cause a rightward shift in the aggregate demand curve
B)a reduction in the price level will cause a leftward shift in the aggregate demand curve
C)the aggregate demand curve is now vertical
D)the aggregate demand curve is now upward sloping

Question 31

Explain securitization and its advantages.

Question 32

Which of the following conditions will most likely coincide with the existence of a liquidity trap?

A)inflation is rising
B)inflation is constant
C)inflation is zero
D)individuals prefer to hold only money and not bonds
E)the real interest rate is negative

Question 33

Suppose a liquidity trap exists and output is below its natural level.Graphically illustrate and explain if the economy can return to its natural level using the AS-AD model.

Question 34

An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

A)the interest rate will increase
B)the interest rate will not change
C)output will decrease
D)the money supply,M,will not change
E)none of the above

Question 35

Discuss the initial policy responses to the financial crisis.

Question 36

What were the immediate effects of the financial crisis on the macro economy.

Question 37

Suppose a liquidity trap situation exists.Which of the following is most likely to occur if taxes are cut?

A)no change in output and no change in the interest rate
B)an increase in output and an increase in the interest rate
C)an increase in output and little change in the interest rate
D)an increase in output and a reduction in the interest rate
E)none of the above

Question 38

The Nikkei,a Japanese stock price index,reached its peak in which of the following years?

A)1980
B)1985
C)1989
D)1992
E)1995

Question 39

When a liquidity trap situation exists,the most appropriate policy to increase output would be

A)a central bank sale of bonds.
B)an increase in government spending.
C)a central bank purchase of bonds.
D)none of the above

Question 40

The primary cause of the reduction in the nominal money supply during the early years of the Great Depression was

A)the Fed's sale of bonds
B)the Fed's purchase of bonds
C)a reduction in the money multiplier
D)none of the above

Question 41

Explain what is meant by the liquidity trap.Also discuss the implications of a liquidity trap for the shapes of the money demand and LM curves.

Question 42

To what extent have monetary policy and fiscal policy been able to limit the severity of the Japanese Slump? Explain.

Question 43

Suppose a liquidity trap exists.Graphically illustrate and explain the effects of an increase in government spending using the IS-LM model.

Question 44

To what extent can a deflation and the presence of a liquidity trap explain the Japanese slump? Explain.