Deck 12: Global Financial Crisis

Question 1

Which of the following has led to low savings?

A) High consumer confidence.
B) Low interest rate.
C) Asset bubble.
D) All of the above.

Answer 1

D

Question 2

Which of the following is an actual cause of the GFC?

A) The related very low saving rates in countries such as the USA and Australia.
B) Global imbalances in saving and borrowing, which allow high borrowing in one country to be financed by high saving in others.
C) Globalisation, which has greatly increased the extent to which an impulse arising in one country is transmitted around the world.
D) All of the above.

Answer 2

D

Question 3

(I-S) is:

A) current account deficit.
B) the extent to which domestic investment is not financed by domestic saving.
C) the demand for funds by governments.
D) deposit- taking institutions.

Answer 3

B

Question 4

All other things being equal, an increase in the government budget deficit will lead to in the current account deficit.

A) an equal increase
B) an equal decrease
C) no change
D) a decrease

Question 5

The government budget (i.e. the of Df) is government _.

A) deficit; negative; saving
B) surplus; negative; saving
C) surplus; positive; saving
D) deficit; positive; saving

Question 6

Globalisation refers to:

A) the removal of, or reduction in, trade barriers such as tariffs and quotas.
B) extensive financial deregulation.
C) the integration of national economies, especially their financial sectors, around the world.
D) technological advances which allowed goods and information to be moved around the world more rapidly and cheaply.

Question 7

Which of the following is correct?

A) CMOs are backed by mortgages.
B) CDOs are packaged commercial mortgages, corporate loans and loans for leveraged buyouts.
C) CDS are packaged commercial mortgages, corporate loans and loans for leveraged buyouts.
D) A and B.

Question 8

GFC is also referred to as the:

A) Bank Crisis.
B) American Financial Crisis.
C) Asian Financial Crisis.
D) Subprime Crisis.

Question 9

Which of the following is a suggested cause of the GFC in popular discussion?

A) Greed.
B) Executive remuneration.
C) A and B.
D) None of the above.

Question 10

The GFC started in:

A) 2007.
B) 2006.
C) 2009.
D) 2008.

Question 11

Which of the following factors boost the consumer confidence?

A) Accumulating benefits in superannuation and pension funds.
B) Increases in property values.
C) Strong economic growth.
D) All of the above.

Question 12

Which of the following actually caused of the GFC?

A) The expansion of borrowing and the decline of credit standards, which created 'toxic' (subprime) debt.
B) An overly loose monetary policy in the USA, which promoted an asset price bubble and generally facilitated subprime lending.
C) A and B.
D) None of the above.

Question 13

Globalisation was created by:

A) technological advances which allowed goods and information to be moved around the world more rapidly and cheaply.
B) extensive financial deregulation.
C) the removal of, or reduction in, trade barriers such as tariffs and quotas.
D) all of the above.

Question 14

A borrower below a FICO score of is classified as subprime.

A) 300
B) 100
C) 1000
D) 680

Question 15

US commentators have argued that the Chinese have undervalued their currency in order to promote exports and economic growth. The Chinese central bank has accomplished this by buying foreign currency so that it has accumulated huge foreign currency assets in what has become known as:

A) a sovereign wealth fund (SWF).
B) devaluation.
C) the Chinese Wall.
D) appreciation.

Question 16

Which of the following equations depicts the twin deficits relationship?

A) CAD = (I + S) + Df.
B) CAD = (I -- S) + Df.
C) CAD = (I +S) - Df.
D) CAD = S+ Df.

Question 17

The GFC led to the failure of:

A) investment vehicles.
B) financial institutions.
C) a number of banks.
D) all of the above.

Question 18

The Global Financial Crisis (GFC) arose from:

A) the rapid growth in subprime debt.
B) the debt held by borrowers who were not creditworthy.
C) borrowers unable to repay their loans.
D) all of the above.

Question 19

The increase in consumer borrowing took the form of:

A) equity release.
B) credit cards.
C) margin lending.
D) all of the above.

Question 20

occurs when the seller simply enters a contract to supply the share at an agreed price on a specified date.

A) Naked short- selling
B) Contagion
C) Credit crunch
D) Moral hazard

Question 21

Borrowing to buy housing in the USA was also encouraged by:

A) mortgage interest payments are tax deductible.
B) mortgage loans are non- recourse in many US states.
C) interest rates are often fixed for long periods.
D) all of the above.

Question 22

During the Crisis, it appears that the shares of some companies were subject to heavy buyouts in an attempt to drive their share prices down.

Question 23

A speculative bubble in an asset market:

A) is usually short term in nature as it usually bursts.
B) has a psychological basis; that is, it involves some irrationality on the part of investors.
C) is a situation in which the price of the asset goes up in a way which is not justified by the fundamentals that normally determine the price of the asset.
D) all of the above.

Question 24

Loans were often made to people who did not have a credit rating or documentation ('low- doc' loans). These have been described as , and borrowers of these loans are often referred to as .

A) liars' loans; NINJAs
B) liars' loans; subprime
C) subprime; liars
D) subprime; homeless

Question 25

On 14 October 2008, the Australian Federal Government announced its $10.4 billion stimulus package.

Question 26

The asset price bubble caused consumers to substitute unrealised capital gains for active saving.

Question 27

An advantage of a CDS is that it allows market participants to take a position on credit risk (i.e. by buying or selling them).

Question 28

There has been a decline in the credit standards and it took the form of housing lending in which the home buyer could borrow 100% of the value of a house and sometimes more.

Question 29

GFC stands for:

A) Good Financial Cost.
B) Global Financial Crisis.
C) Grand Financial Conference.
D) Global Financial Cost.

Question 30

Which of the following reforms was suggested by the Crisis?

A) The role of credit rating agencies needs to be reconsidered.
B) Hedge funds should be subject to greater regulation to increase their transparency.
C) All of the above.
D) All lending should come under a single regulator.

Question 31

Globalisation is criticised because:

A) it destroys industries in advanced countries.
B) it leads to the exploitation of workers in developing countries.
C) A and B.
D) none of the above.

Question 32

The Crisis also led to a reduction in lending, which made it difficult for consumers and businesses to obtain loans to support their spending. This phenomenon is colloquially known as a:

A) credit crunch.
B) contagion.
C) short lending.
D) moral hazard.

Question 33

Df is:

A) the demand for funds by governments.
B) deposit- taking institutions.
C) the extent to which domestic investment is not financed by domestic saving.
D) current account deficit.

Question 34

How did the Crisis affect real economies around the world?

A) Related changes in market interest rates.
B) Impact on business and consumer confidence.
C) Drying- up of credit.
D) All of the above.

Question 35

Which of the following events took place during the GFC?

A) September 2008: Lehman Brothers failed and Merrill Lynch was absorbed by Bank of America.
B) Bernard Madoff, a leading hedge fund operator, admitted that his fund was a Ponzi scheme. He admitted to taking $50 billion of investors' money.
C) RAMS Home Loans in Australia was sold to Westpac because it could not obtain adequate wholesale funding.
D) All of the above.

Question 36

An indicator of the banks' shift to liquidity are the balances in the exchange settlement accounts (ESAs) with the RBA.

Question 37

Which of the following did not occur during the GFC?

A) 6 August 2007: American Home Mortgage Investment Corporation files for bankruptcy.
B) 3 August 2007: Australia introduced a stimulus package.
C) 2 August 2007: German bank IKB Deutche bailed out by a German state- run bank.
D) 1 August 2007: AXA bond funds announce large losses.

Question 38

A credit default swap (CDS) is a derivative which provides insurance against loss on a loan.

Question 39

The advantage of globalisation is that it:

A) increases average incomes around the world.
B) raises income in developing countries.
C) leads to the exploitation of workers.
D) A and B.

Question 40

Greenspan (2008) argues that the demand for repackaging of subprime mortgages was inexistent and could not have led to subprime lending.

Question 41

Many houses were purchased by investors speculating on the housing bubble, but were never occupied by their owners.

Question 42

US housing loans are made on the basis of a FICO score (named after Fair Isaacs and Company) which seeks to quantify the creditworthiness of a potential borrower.

Question 43

A number of governments, including the Australian Government, banned short- selling for a limited time during the GFC period.

Question 44

US lenders did not offer the Option ARM mortgages to their borrowers and as a result they could not repay.

Question 45

A sign of the credit crunch was the sharp increase in credit spreads on non- government paper.

Question 46

The problems of the subprime crisis led to a number of governments having to intervene to shore up their banking system.

Question 47

The SPV is not responsible for collecting the repayments from borrowers, and repackages the mortgages into large denomination (wholesale) securities.

Question 48

One indicator of a credit crunch is the extent to which market interest rates approximates the cash interest rates.

Question 49

It is important to distinguish between public (national) debt and external debt. The former is the accumulation over time of the deficits in the government sector.

Question 50

In June 2007 the spread on BBB (i.e. low- rated) paper with maturity 1- 5 years relative to Commonwealth Government bonds was 0.88%, but by the end of 2008 it had reached 4.50%, and in early 2009 it went to around 5.80%.

Question 51

In a bubble situation, the expected capital gain idecreases rapidly and the dividend yield increases.

Question 52

A CDO is a diversified, actively managed pool of loans or bonds that issues rated securities and equity.

Question 53

The fall in the value of asset- backed securities were profitable for the ultimate holders of these securities.

Question 54

This process of cumulative bank failures (which can extend to other countries) is known as short- selling.

Question 55

The fee paid on a CDS is equal to Probability of making a payment x Percentage loss in the event of a failure.

Question 56

In a credit default swap (CDS), the borrower pays a fee to the swap provider and in return receives compensation for any loss on the loan covered by the swap.

Question 57

CDS does not have a market price and there is no guarantee that the counterparty will be able to fulfil its responsibilities.

Question 58

Prior to the Crisis, there was a regulatory failure in that lenders outside the regulatory net were permitted to adopt these reduced standards.

Question 59

CDS is an over- the- counter (OTC) instrument which is not traded on an exchange.

Question 60

Institutions in fringe banking areas (e.g. investment banks) are not subject to the same capital controls as banks and, in many cases, adopted a very high leverage.

Question 61

When the Crisis arose, some banks were forced to sell the impaired debt.

Question 62

Irresponsible borrowing in the USA was also encouraged by low 'teaser' or 'honeymoon' rates which borrowers could not support when they were reset at higher levels.

Question 63

Margin lending is the way people could borrow on the equity in their homes.

Question 64

Bubbles always correct themselves. However, the process can destabilise the market and the economy as a whole.

Question 65

When the asset price bubble in housing burst, the percentage of defaults decreased.

Question 66

Describe a CDS.

Question 67

Credit rating agencies have been widely criticised following the emergence of the GFC.

Question 68

What are the lessons learned from this crisis and what are the implication for borrowers?

Question 69

Bremmer (2009, p. 50) estimates that, at the end of 2008, SWFs held USD10 trillion up from USD4 trillion in 2007.

Question 70

The Chinese saving which gave rise to its current account surplus has been described as a 'saving glut'.