Question 1

A bank with a leverage ratio of 9 to 1 has

Accepted Answer

The leverage ratio is calculated as the ratio of total assets to total equity or capital. In this case, the bank has a leverage ratio of 9 to 1, which means it has $9 in assets for every $1 in capital. Therefore, option B is the correct answer. The other options are not correct as they misinterpret the meaning of the leverage ratio.

Question 2

Which of the following statements is false?

Accepted Answer

John Taylor argued that the low interest rates in the early-2000s were due to the Federal Reserve's monetary policy, not the global savings glut. The global savings glut was a concept introduced by Ben Bernanke.

Question 3

Collateralized debt obligations are

Accepted Answer

Collateralized debt obligations (CDOs) are similar to mortgage-backed securities in that they are divided into tranches or slices, which are unequal. They are also considered assets for those who purchase them.

Question 4

What does the term run on the bank mean?

Accepted Answer

A "run on the bank" refers to a situation where many depositors rush to withdraw their money from a bank at the same time, usually due to concerns about the bank's solvency. This can lead to a bank's insolvency if it does not have enough cash on hand to meet all the withdrawal demands.

Question 5

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 loans given to individuals with low credit ratings or poor credit history, making them a higher risk for lenders. These loans often have higher interest rates and are sometimes backed by collateral such as the home being purchased.

Question 6

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

Accepted Answer

The global savings glut suggests that there is an excess of savings over investment opportunities worldwide, leading to low interest rates. This is consistent with the choice of low interest rates option. Additionally, a high global savings-World GDP ratio implies that there is an excess of savings relative to the size of the global economy, which is also consistent with the choice of low interest rates and high global savings-World GDP ratio. Therefore, option D (low interest rates and high global savings-World GDP ratio) is more consistent with a global savings glut.

Question 7

According to Alan Greenspan,the Taylor rule is ________________ when trying to figure out the causes of sharp increases in housing prices.His opinion is based,in part,on his assertion that the Taylor rule addresses ____________ inflation,not ____________ inflation.

Accepted Answer

The Taylor rule is considered inappropriate by Greenspan for explaining sharp increases in housing prices because it focuses on product-price inflation rather than asset-price inflation.

Question 8

As a bank approaches insolvency,it is likely to

Accepted Answer

As a bank approaches insolvency, it is likely to decrease its lending activities (option A) in a bid to conserve capital and reduce risks. Additionally, it may find that its capital is declining (option C) due to increased loan losses and write-offs. Therefore, options A and C are correct, making choice E the best answer. The other options (B and D) are not practical because they involve increasing lending activities and liabilities, which would exacerbate the bank's financial problems.

Question 9

When we say that the financial crisis can be viewed as a balance sheet problem,this is descriptive of

Accepted Answer

A balance sheet problem refers to the situation where a company's liabilities exceed its assets, leading to insolvency. During the financial crisis, many banks possessed assets such as mortgages and securities that were declining in value rapidly, making them insolvent or approaching insolvency. Therefore, the financial crisis can be viewed as a balance sheet problem for many banks. Choices A, C, and D are incorrect as they do not describe a balance sheet problem.

Question 10

A bank with a leverage ratio of 6.5 to 1 has

Accepted Answer

The leverage ratio is calculated by dividing total assets by the bank's capital, so a leverage ratio of 6.5 to 1 means that the bank has $6.50 in assets for every $1 in capital. Therefore, choice B is the correct answer. Choice A is incorrect because it refers to liabilities instead of capital. Choices C and D have the numbers reversed and are therefore incorrect.

Question 11

When borrowers are unable to make their monthly mortgage payments,the value of mortgage-backed securities and collateralized debt obligations

Accepted Answer

When borrowers are unable to make their monthly mortgage payments, the value of mortgage-backed securities and collateralized debt obligations falls. This is because the likelihood of default increases, leading to a decline in the expected cash flows from these instruments. As a result, banks that own such securities may suffer losses or become insolvent, particularly if they are heavily invested in these assets.

Question 12

With collateralized debt obligations (CDOs)buyers are purchasing _________ slices,and buyers of mortgage-backed securities (MBSs)purchase ___________ slices.

Accepted Answer

With collateralized debt obligations (CDOs), buyers are purchasing unequal slices because the underlying assets are not homogeneous, and therefore, different slices may have different risk and return profiles. On the other hand, buyers of mortgage-backed securities (MBSs) purchase equal slices because the underlying assets are homogeneous (mortgages), and therefore, all slices have the same risk and return profiles.

Question 13

The Taylor rule is a recommendation of how

Accepted Answer

The Taylor rule recommends that the Fed should set the federal funds rate target based on inflation and output gaps. It suggests that the Fed should raise interest rates when inflation is above its target or when the economy is overheating, and lower rates when inflation is below target or when the economy is sluggish. Therefore, the Taylor rule is a guideline for the Fed's monetary policy decisions, specifically in setting the federal funds rate target. The other choices are not related to the Taylor rule.

Question 14

A subprime mortgage loan is a loan granted to persons who

Accepted Answer

A subprime mortgage loan is a type of loan that is granted to individuals who have a higher risk of default due to factors such as low credit scores or a history of late payments. This type of loan typically has a higher interest rate to compensate for the increased risk of default.

Question 15

In the early 2000s,the Fed's ____________ interest rate policy had several effects.Among these effects were a _______________ in mortgage interest rates and a(n)____________ in the size of loans taken out by mortgage borrowers.

Accepted Answer

The answer of In the early 2000s,the Fed's ____________ interest...

Question 16

International standards for risk-based capital requirements were introduced under the

Accepted Answer

The 1988 Basel Accord, also known as Basel I, introduced international standards for risk-based capital requirements for banks. It aimed to ensure that banks hold enough capital to cover potential losses and to promote financial stability. The other options listed do not specifically relate to risk-based capital requirements.

Question 17

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

Accepted Answer

When bank assets decline in value and banks approach insolvency, they cut back on lending. This reduction in lending results in consumers purchasing less, and some firms produce less while others go out of business. This is a clear spillover effect from the financial sector into the real sector of the economy.

Question 18

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 mortgage loans together and selling slices of the bundle.

Question 19

For a bank,more capital means more _____________,and it also means ___________ returns when asset values are rising.

Accepted Answer

More capital means more safety for a bank, as it provides a buffer against losses. However, it also means lower returns when asset values are rising because the bank is using more of its own funds rather than leveraging borrowed funds to generate returns.

Question 20

Which of the following bank assets declined in value in the mid-2000s?

Accepted Answer

All of the listed bank assets declined in value in the mid-2000s due to the subprime mortgage crisis and the resulting economic downturn. Subprime loans, mortgage-backed securities, collateralized debt obligations, and nontraditional loans were all heavily affected by the crisis.

Quiz 18: The Financial Crisis of 2007-2009

A bank with a leverage ratio of 9 to 1 has

Which of the following statements is false?

Collateralized debt obligations are

What does the term run on the bank mean?

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

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

According to Alan Greenspan,the Taylor rule is ____ when trying to figure out the causes of sharp increases in housing prices.His opinion is based,in part,on his assertion that the Taylor rule addresses inflation,not inflation.

As a bank approaches insolvency,it is likely to

When we say that the financial crisis can be viewed as a balance sheet problem,this is descriptive of

A bank with a leverage ratio of 6.5 to 1 has

When borrowers are unable to make their monthly mortgage payments,the value of mortgage-backed securities and collateralized debt obligations

With collateralized debt obligations (CDOs) buyers are purchasing _ slices,and buyers of mortgage-backed securities (MBSs) purchase ___ slices.

The Taylor rule is a recommendation of how

A subprime mortgage loan is a loan granted to persons who

In the early 2000s,the Fed's ____ interest rate policy had several effects.Among these effects were a _ in mortgage interest rates and a(n) ______ in the size of loans taken out by mortgage borrowers.

International standards for risk-based capital requirements were introduced under the

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

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

For a bank,more capital means more ___,and it also means _ returns when asset values are rising.

Which of the following bank assets declined in value in the mid-2000s?

Quiz 18: The Financial Crisis of 2007-2009

A bank with a leverage ratio of 9 to 1 has

Which of the following statements is false?

Collateralized debt obligations are

What does the term run on the bank mean?

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

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

According to Alan Greenspan,the Taylor rule is ________________ when trying to figure out the causes of sharp increases in housing prices.His opinion is based,in part,on his assertion that the Taylor rule addresses ____________ inflation,not ____________ inflation.

As a bank approaches insolvency,it is likely to

When we say that the financial crisis can be viewed as a balance sheet problem,this is descriptive of

A bank with a leverage ratio of 6.5 to 1 has

When borrowers are unable to make their monthly mortgage payments,the value of mortgage-backed securities and collateralized debt obligations

With collateralized debt obligations (CDOs) buyers are purchasing _________ slices,and buyers of mortgage-backed securities (MBSs) purchase ___________ slices.

The Taylor rule is a recommendation of how

A subprime mortgage loan is a loan granted to persons who

In the early 2000s,the Fed's ____________ interest rate policy had several effects.Among these effects were a _______________ in mortgage interest rates and a(n) ____________ in the size of loans taken out by mortgage borrowers.

International standards for risk-based capital requirements were introduced under the

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

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

For a bank,more capital means more _____________,and it also means ___________ returns when asset values are rising.

Which of the following bank assets declined in value in the mid-2000s?

According to Alan Greenspan,the Taylor rule is ____ when trying to figure out the causes of sharp increases in housing prices.His opinion is based,in part,on his assertion that the Taylor rule addresses inflation,not inflation.

With collateralized debt obligations (CDOs) buyers are purchasing _ slices,and buyers of mortgage-backed securities (MBSs) purchase ___ slices.

In the early 2000s,the Fed's ____ interest rate policy had several effects.Among these effects were a _ in mortgage interest rates and a(n) ______ in the size of loans taken out by mortgage borrowers.

For a bank,more capital means more ___,and it also means _ returns when asset values are rising.