Deck 13: International Banking and Financial Markets

Question 1

The eurocurrency market first appeared in:

A) London during the 1950s.
B) New York after World War II.
C) London in the late 1800s.
D) Paris during the 1980s.

Answer 1

London during the 1950s.

Question 2

The eurocurrency markets developed because:

A) governments provided incentives for banks to do foreign banking business.
B) bank customers sought to evade government restrictions on international investment.
C) some countries holding dollars preferred to hold them outside the U.S.
D) All of the above.
E) None of the above.

Answer 2

All of the above.

Question 3

The development of eurocurreny markets began with:

A) the restriction of foreign investment by the U.S. in the 1960s.
B) the Bretton Woods Conference of 1944.
C) the Suez Crisis of 1956.
D) the repeal of the Glass-Steagall Act in 1999.

Answer 3

the Bretton Woods Conference of 1944.

Question 4

Foreign portfolio investment in the United States grew very rapidly in the 1980s and 1990s because:

A) U.S. regulators opened stock and bond markets to foreign investors for the first time.
B) the U.S. economy collapsed, thus making U.S. assets very inexpensive.
C) many foreign governments eliminated restrictions that limited their citizens' and financial firms' ability to acquire foreign assets.
D) All of the above.
E) None of the above.

Question 5

Which of the following does not accurately describe the international investment position?

A) It is a measure of the country's overall net stock of overseas assets.
B) It is a compilation of flows of payments over a period of time, usually a year.
C) It measures the net stock of domestically-owned foreign assets and foreign-owned domestic assets.
D) It reflects the present value of past foreign asset accumulation.

Question 6

The international investment position of the United States during the 1980s:

A) went from negative to positive.
B) went from positive to negative.
C) remained unchanged.
D) fluctuated randomly.

Question 7

American depository receipts (ADRs):

A) account for nearly half of all U.S. investment in foreign stocks.
B) are used exclusively by foreign investors to buy U.S. stocks.
C) were a popular means for buying foreign stocks before the development of foreign stock markets in the 1980s.
D) are an obsolete form of banking that no longer exists in developed economies.

Question 8

American depository receipts (ADRs) are:

A) stocks issued directly by foreign corporations but traded on U.S. stock exchanges.
B) bonds issued by the U.S. government on behalf of foreign governments.
C) receipts for actual foreign stocks deposited in U.S. banks that are traded on a U.S. stock exchange such as the New York Stock Exchange or the NASDAQ.
D) illegal but still often used by Americans seeking to hide money overseas.

Question 9

The availability of ADRs that can be bought and sold on U.S. stock markets most likely:

A) increases the total amount of direct purchases of foreign stocks by Americans.
B) decreases the total amount of direct purchases of foreign stocks by Americans.
C) has no effect whatsoever on the total amount of foreign investment by Americans.
D) increases the amount of U.S. assets acquired by foreign investors.

Question 10

Which of the following contributed to the 2008 global financial crisis?

A) Secretive over-the-counter financial markets.
B) Short-term incentives for bankers.
C) Deregulation of financial markets.
D) All of the above.
E) None of the above.

Question 11

Among the consequences of the 2008-2009 global financial crisis is:

A) increased government debt related to government transfers to financial conglomerates.
B) the fragmentation of the financial sector as financial conglomerates were broken up and reorganized.
C) the definitive abandonment of the "too big to fail" principle.
D) a sharp reversal of deregulation as governments completely rebuilt the regulatory structures they had abandoned earlier.

Question 12

At the start of the twenty-first century, the financial industry in the U.S. and many other high-income European countries was increasingly characterized by:

A) agglomeration of financial activities into large financial firms.
B) securitization of loans.
C) deregulation and reduced government oversight.
D) All of the above.
E) None of the above.

Question 13

The event that ended up triggering the 2008 financial crisis was:

A) a housing bubble that burst.
B) new legislation that reregulated the banks.
C) excessive borrowing by a group of developing countries.
D) the discovery of a massive Ponzi scheme by a well-known New York financier.

Question 14

The collateralized debt obligations (CDOs) that were popular in the early 2000s were often split into tranches:

A) each with different interest rates and a different priority status.
B) that were individually rated by one of the principal ratings firms.
C) designed to just barely warrant a specific rating under the economic and financial conditions at the time the CDO was issued.
D) All of the above.
E) None of the above.

Question 15

The 2008-2009 global financial crisis has:

A) revealed that financial intermediaries and markets efficiently channeled savings to society's most advantageous investments.
B) led to the breakup of the major financial conglomerates.
C) validated the late twentieth-century deregulation of the financial industry.
D) All of the above.
E) None of the above.

Question 16

Credit default swaps:

A) are a type of loan.
B) can be used to place a bet on the default of an investment even without owning the investment.
C) were invented by British investment houses in the nineteenth century.
D) were issued by banks to cover their losses from investing in A. I.G.

Question 17

The 1933 Glass-Steagall Act:

A) limited savings banks to taking deposits and making mortgages.
B) limited commercial banks to making business and consumer loans.
C) prohibited investment banks from soliciting small deposits from the general public through retail banking locations.
D) All of the above.
E) None of the above.

Question 18

Which of the following statements about the financial history of the U.S. after 1990 is true?

A) The U.S. Federal Reserve Bank generally kept the money supply very tight.
B) Consumer goods inflation was high.
C) Housing prices increased very rapidly between 2002 and 2006.
D) All of the above.
E) None of the above.

Question 19

Among the policy responses to the 2008 financial crash and global recession was:

A) a large set of new financial regulations.
B) the breakup of the large financial conglomerates.
C) expansion of the money supply and the reduction of short-term interest rates.
D) All of the above.
E) None of the above.

Question 20

John Maynard Keynes and Hyman Minsky offer models that show:

A) an unregulated financial system is inherently unstable.
B) unrestrained capitalism was superior to a mixed socialist/capitalist system.
C) the U.S. financial system can generate endless rises in asset values and corporate profits.
D) All of the above.
E) None of the above.

Question 21

According to Hyman Minsky, when a project's cash flow from operations is not sufficient to meet interest or dividend payments, much less cut into the outstanding debt, the project is catergorized as:

A) hedge financing.
B) speculative financing.
C) Ponzi financing.
D) roll-over financing.

Question 22

Hyman Minsky's hypotheses are most accurately described as stating that:

A) a sudden change in economic conditions causes speculative businesses to become Ponzi ventures.
B) rational investors know how to evaluate investments under all probable economic outcomes.
C) it takes a very severe shift in economic circumstances to convert hedge financing into speculative financing or speculative financing into Ponzi financing.
D) a financial system in which most financing arrangements fall into the category of hedge financing is unstable and likely to result in a financial crisis.

Question 23

Macroeconomic policymakers prevent the growth of speculative and Ponzi financing by:

A) setting reserve requirements for commercial banks and restricting loan terms.
B) guaranteeing loans and deposits.
C) permitting the mergers of different financial organizations so that they can more readily shift from one kind of financial activity to another.
D) All of the above.
E) None of the above.

Question 24

According to John Maynard Keynes,

A) short-term prices driven by speculators and gamblers end up influencing long-term decisions by lenders and borrowers.
B) the short-term focus of financial markets makes the allocation of savings to investment inefficient.
C) financial markets would function better if there was a small financial transactions tax.
D) All of the above.
E) None of the above.

Question 25

John Maynard Keynes' description of how investors set expectations:

A) conflicts with Muth's rational expectations hypothesis that underlies modern macroeconomic and financial analysis.
B) is perfectly compatible with the rational expectations hypothesis that underlies modern macroeconomic and financial analysis.
C) suggests that financial markets work even better than the rational expectations hypothesis predicts.
D) explains why the short-term focus of financial markets results in prices that efficiently guide long-run investment decisions.

Question 26

Among the reasons why economists failed to anticipate the 2008 global financial crisis is:

A) the acceptance of the efficient markets hypothesis.
B) that predictions of the future were largely based on experience from the recent past, which did not include any major financial crisis in developed economies.
C) the exclusive use of economic models that were based on mathematics and microfoundations, which for practical reasons were limited to stable linear systems.
D) All of the above.
E) None of the above.