Deck 10: Systemic Risk, Moral Hazard Bailouts

Question 1

All of the following are government bailouts except:

A)Airline industry in 2001 following the 9/11 attack.
B)U.S.auto industry in 1979-1981 after spike in gas prices made large cars unpopular.
C)Long Term Capital Management LTCM) in 1998.
D)All of the above.
E)None of the above.

Answer 1

D

Question 2

Moral Hazard and compensation contracts that reward large profits with bonuses both give executives similar incentives to increase risk.

Answer 2

True

Question 3

Investment banks made similar decisions with respect to betting the firms existence on a single sector of the economy when they were partnerships as when they were publicly traded corporations.

Answer 3

False

Question 4

Government bailouts are motivated by the concern that the economy will be severely affected if critically important firms are permitted to fail.

Question 5

Bailouts are common features of government because they avoid any adverse incentive effects.

Question 6

Systemic risk describes risk that an audit system will not pick up fraud within a firm.

Question 7

The collapse of Iceland's financial market and economy in 2008 show that the concern over the "domino effect" in financial markets is a concern that should be taken seriously.

Question 8

Managers of U.S.auto companies could not have known in 2008 that gas prices could increase suddenly leaving them unable to sell their lineup of gas guzzling vehicles.

Question 9

What does TARP stand for in the $700 billion program enacted in the fall of 2008?

A)Total Assistance Remedy Program
B)Top Assets Refurbish Program
C)Troubled Asset Relief Program
D)Total Above Review Program
E)None of the above.

Question 10

What was the primary motivation for the Federal Reserve and U.S.Treasury in spending more than a trillion dollars to bailout firms in the fall of 2008?

A)They were rewarding campaign contributors.
B)They were trying to avoid a financial collapse that would lead to another Great Depression.
C)They were trying to reduce moral hazard.
D)All of the above.
E)None of the above.