Question 1

A bank is solvent as long as its liabilities are greater than its assets.

Accepted Answer

A bank is solvent as long as its assets are greater than its liabilities, not the other way around. This is because the assets of a bank represent the funds that it can use to cover its liabilities, such as loans, deposits, and other obligations. If the bank's liabilities exceed its assets, it may not have enough funds to pay its debts and could become insolvent.

Question 2

If M = $1,200 billion and V = 4,then total spending is _______________billion. Then velocity falls to 2 and M rises to $2,000 billion,so that total spending is now _______________ billion,and GDP has _________________.

Accepted Answer

The answer of If M = $1,200 billion and V...

Question 3

What does the term run on the bank mean?

Accepted Answer

A run on the bank refers to a situation where a large number of depositors rush to withdraw their funds from the bank, leading to a potential bankruptcy of the bank.

Question 4

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
...

Question 5

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

Accepted Answer

A high leverage ratio means that the bank has a high level of debt in proportion to its equity. As the value of the bank's assets increases, the same level of debt becomes a smaller proportion of the total value, thereby increasing the percentage rise in its capital.

Question 6

Collateralized debt obligations are

Accepted Answer

The answer of Collateralized debt obligations are
...

Question 7

Regulatory capital is the amount of capital financial institutions should hold based on the riskiness of their different assets.

Accepted Answer

The answer of Regulatory capital is the amount of capital...

Question 8

The downside to a bank having a high leverage ratio is that a decline in asset value magnifies losses.

Accepted Answer

When a bank has a high leverage ratio, it means that it has more debt relative to its assets. This means that even a small decline in asset value can lead to a significant magnification of losses, as the bank has to use a larger portion of its assets to pay off its debt. This can make the bank more vulnerable to financial distress and potentially increase the risk of default.

Question 9

Bank B takes 15,000 mortgage loans,bundles them together,and then sells slices of the bundle. This is descriptive of

Accepted Answer

Bank B is creating a mortgage-backed security by bundling the loans together and selling slices of the bundle.

Question 10

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

The answer of According to economist John Taylor,the Fed set...

Question 11

The answer is,"They are mortgage loans granted to persons who might have low credit ratings." The question is:

Accepted Answer

Subprime mortgage loans are specifically designed for people with lower credit scores, which can make it difficult for them to qualify for traditional loans. These loans are often associated with higher interest rates and may require higher down payments as well.

Question 12

Suppose the Fed lowers its federal funds rate target. The Fed probably seeks to

Accepted Answer

When the Fed lowers its federal funds rate target, it is indicating that it wants the actual federal funds rate to also decrease. This is because the federal funds rate target is the interest rate that banks charge each other for overnight loans, and a lower target rate should result in lower actual rates. Lowering the actual federal funds rate can stimulate borrowing and spending in the economy, which is the goal of such a move by the Fed.

Question 13

Rising savings rates in emerging countries in the period 2000-2008 are associated with both falling and rising mortgage interest rates in the United States.

Accepted Answer

The savings rates in emerging countries were influenced by factors such as high commodity prices and export growth, which led to increased investment and savings. This resulted in a surplus of savings that was invested in the US, driving down mortgage interest rates. However, some of these savings were also invested in commodities, which drove up prices and led to higher inflation and higher mortgage interest rates in the US. Therefore, rising savings rates in emerging countries were associated with both falling and rising mortgage interest rates in the US.

Question 14

As a bank approaches insolvency,it is likely to

Accepted Answer

As a bank approaches insolvency, it is likely to decrease its lending activities to conserve its remaining capital, and it will find that its capital is declining due to various reasons such as non-performing loans, write-offs, or reduction in profits. Therefore, both A and C are correct, and the best answer is E. The bank is also unlikely to try to increase its liabilities as it needs to reduce its risk-taking and strengthen its financial position.

Question 15

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

Accepted Answer

A global savings glut occurs when there is an oversupply of savings in the world economy relative to desired investment. This typically leads to low interest rates and a high global savings-World GDP ratio. Option D is more consistent with this, as it suggests both low interest rates and a high savings-GDP ratio, which would be typical in a global savings glut scenario.

Question 16

All other things being equal among the banks below,which bank is the least likely to become insolvent?

Accepted Answer

The answer of All other things being equal among the...

Question 17

When the money supply increases at the same time that velocity is decreasing,total spending will

Accepted Answer

When the money supply increases and velocity decreases, total spending will only fall if the decrease in velocity is relatively greater than the increase in the money supply. This is because the decrease in velocity means each unit of money is being used less frequently, offsetting the increase in the money supply. Therefore, the net effect on total spending will depend on which change is greater.

Question 18

During the Great Recession,the growth rate of Real GDP _________________ and the inflation rate ___________________.

Accepted Answer

The answer of During the Great Recession,the growth rate of...

Question 19

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

Accepted Answer

The Taylor Rule is designed to address product-price inflation, which is caused by excess demand in the economy. It does not address asset-price inflation, which is caused by speculative behavior in asset markets. The rule helps central banks set interest rates to balance inflation and output fluctuations in the short run.

Question 20

During a time of rising asset values,a bank can increase its returns by engaging in regulatory capital arbitrage.

Accepted Answer

During a time of rising asset values, a bank can increase its returns by engaging in regulatory capital arbitrage. This involves taking advantage of differences in regulatory capital requirements for various assets to shift the bank's portfolio towards higher-return assets. This can increase the bank's profitability during a time of rising asset values.

Quiz 18: The Financial Crisis of 2007-2009