Question 1

The savings and loan crisis began in the early 1970s, when interest rates increased sharply and depositors at S&Ls withdrew their money from their low-interest savings accounts and invested in money market accounts that paid higher interest rates.

Accepted Answer

This is an accurate description of the beginning of the savings and loan crisis.

Question 2

High inflation rates in the 1970s were helpful to S&Ls because the price of the fees that S&Ls charged increased faster than their costs, so that the profitability of S&Ls increased.

Accepted Answer

The answer of High inflation rates in the 1970s were...

Question 3

Under the Glass-Steagall Act, investment banks were allowed to accept deposits that were not covered by deposit insurance, as well as to trade in financial assets, such as stocks and bonds.

Accepted Answer

The answer of Under the Glass-Steagall Act, investment banks were...

Question 4

Savings and loans were very profitable in the 1970s because investors withdrew their funds from low-interest-paying money market accounts and invested them in high-interest-paying accounts at thrifts.

Accepted Answer

The answer of Savings and loans were very profitable in...

Question 5

The losses to S&L depositors were paid entirely from the assets of the failed thrifts and funds of the owners.

Accepted Answer

The losses to S&L depositors were primarily paid through a government bailout program known as the Resolution Trust Corporation (RTC). The RTC used taxpayer funds to take over and liquidate failed thrifts, and then used the proceeds from selling their assets to reimburse depositors. However, some losses were also partially borne by the owners of the failed thrifts through required contributions to the bailout fund.

Question 6

The balance sheet effect is the increase in a firm's net worth due to falling asset prices.

Accepted Answer

The balance sheet effect is typically associated with rising asset prices, which increases a firm's net worth. When asset prices fall, it can have a negative impact on a firm's net worth.

Question 7

Although many of the regulations established in the 1930s have disappeared, Regulation Q and the prohibition of commercial banks from trading financial assets, such as stocks and bonds, remain in place today.

Accepted Answer

The answer of Although many of the regulations established in...

Question 8

To make it easier for S&Ls to compete with banks in the late 1970s, Congress allowed the thrifts to undertake riskier investments in addition to home mortgages.

Accepted Answer

This statement is true. Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980, which allowed savings and loans to diversify their asset portfolios and invest in riskier ventures such as commercial real estate, consumer and commercial loans, and junk bonds. This led to a wave of speculative investments by S&Ls that ultimately contributed to the savings and loan crisis of the 1980s.

Question 9

In 1989 Congress increased oversight of S&Ls and allowed two government agencies, Fannie Mae and Freddie Mac, to take over much of the home mortgage lending previously done by the thrifts.

Accepted Answer

This statement accurately describes the events that took place in 1989. Congress passed legislation to increase regulation of S&Ls following the savings and loan crisis, and Fannie Mae and Freddie Mac were authorized to become major players in the home mortgage lending industry.

Question 10

Fannie Mae and Freddie Mac are quasi-government agencies established during the Great Depression to make home ownership more affordable for low- and moderate-income households.

Accepted Answer

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) were both established by the federal government during the Great Depression to help make homeownership more accessible and affordable for Americans. While they are technically private companies, they have a special relationship with the government and operate under a government charter.

Question 11

The purpose of Regulation Q, which prevented banks from paying interest on checking accounts, was to prevent unhealthy competition between banks.

Accepted Answer

Regulation Q was put into place by the Federal Reserve in 1933 to prevent banks from competing with each other by offering higher interest rates on checking accounts. The idea was that by limiting the interest rates that banks could offer, they would be forced to compete on other features, such as customer service or convenient locations. However, the regulation was ultimately repealed in 2011, as it was seen as outdated and no longer effective in achieving its intended purpose.

Question 12

The Glass-Steagall Act of 1933 gave the Reconstruction Finance Corporation the power to make loans to commercial banks but prohibited the Federal Reserve from making loans to commercial banks.

Accepted Answer

The Glass-Steagall Act of 1933 prohibited commercial banks from engaging in securities activities and gave the Federal Reserve the power to make loans to commercial banks. It did not give the Reconstruction Finance Corporation the power to make loans to commercial banks.

Question 13

A hedge fund is a relatively unregulated private investment partnership open only to wealthy individuals and institutions.

Accepted Answer

Hedge funds are indeed relatively unregulated private investment partnerships that are typically only open to wealthy individuals and institutions. They are not subject to the same strict regulations and reporting requirements as mutual funds and other types of investment vehicles.

Question 14

Savings and loans accept long-term savings deposits and use them to fund short-term loans to businesses.

Accepted Answer

Savings and loans institutions accept deposits and primarily use these funds to provide mortgages and other long-term loans to individuals for home buying or home improvement purposes, with a portion of their funds also used for short-term loans. They do not typically fund short-term loans to businesses.

Question 15

Many S&Ls failed in the late 1970s and early 1980s when they lost most of their depositors to Fannie Mae and Freddie Mac.

Accepted Answer

Many S&Ls failed in the late 1970s and early 1980s due to risky investments and fraudulent activities, not necessarily because of losing depositors to Fannie Mae and Freddie Mac.

Question 16

Under the Glass-Steagall Act, commercial banks, which accept deposits and are covered by deposit insurance, were not allowed to trade in financial assets, such as stocks and bonds.

Accepted Answer

This is the core provision of the Glass-Steagall Act. Commercial banks were separated from investment banks, which were allowed to trade in financial assets.

Question 17

The banking crises of the 1930s resulted in a very large increase in the money supply, which increased the severity of the Great Depression.

Accepted Answer

The banking crises of the 1930s actually resulted in a decrease in the money supply, as many banks failed and people lost their savings. This decrease in the money supply contributed to the severity of the Great Depression.

Question 18

High inflation rates in the 1970s were harmful to S&Ls because they decreased the value of the thrifts' long-term mortgages.

Accepted Answer

High inflation rates eroded the value of the money that S&Ls had lent out in the form of long-term mortgages, resulting in lower profits and possible insolvency.

Question 19

Fannie Mae and Freddie Mac are the government agencies that insure deposits at financial institutions.

Accepted Answer

Fannie Mae and Freddie Mac are not government agencies that insure deposits at financial institutions. They are government-sponsored enterprises (GSEs) that provide liquidity to the mortgage market by buying mortgages from lenders and packaging them into securities to sell to investors. Deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government.

Question 20

Savings and loans are financial institutions that accept savings and use them to fund long-term mortgages for home buyers.

Accepted Answer

Savings and loans, also known as thrift institutions, were originally created to provide a source of funding for people to buy homes. They accept deposits from customers and use those funds to provide long-term loans for mortgages.

Quiz 26: Money, Banking, and the Federal Reserve System