Question 1

The bursting of an asset price bubble&#10;A) Always causes major damage to the financial system and the economy&#10;B) Causes more severe damage to the economy when the financial system is bypassed&#10;C) Causes more severe damage to the economy when major financial institutions are affected&#10;D) Cannot occur under because of efficient markets

Accepted Answer

The bursting of an asset price bubble causes more severe damage to the economy when major financial institutions are affected because these institutions play a critical role in the financial system. Their impairment can lead to a loss of confidence, reduced lending, and a cascading effect on investment and consumption, thereby exacerbating economic downturns.

Question 2

Recessions resulting from financial crises&#10;A) Are more severe than recessions stemming from other causes but their recoveries are faster&#10;B) Are less severe than recessions stemming from other causes but their recoveries are slower&#10;C) Are less severe than recessions stemming from other causes but their recoveries are faster&#10;D) Are more severe than recessions stemming from other causes and their recoveries are slower

Accepted Answer

Recessions that result from financial crises are generally more severe and have slower recoveries compared to recessions that stem from other causes. This is because financial crises often lead to a more significant breakdown in the financial system, affecting lending, investment, and consumption more deeply and for longer periods.

Question 3

An adverse feedback loop refers to&#10;A) A vicious interaction between worsening conditions in the financial system and slumping conditions in the economy&#10;B) A deteriorating relationship between policymaking choices and the economy&#10;C) A deteriorating relationship between inflation and the financial system&#10;D) Panics in the banking system

Accepted Answer

An adverse feedback loop in the context of economics and finance refers to a situation where poor economic conditions and a struggling financial system exacerbate each other, leading to a cycle of worsening conditions in both areas.

Question 4

As a priority of the Fed (and some other major central banks), financial stability&#10;A) Ranks below monetary policy&#10;B) Has taken on a comparable ranking to monetary policy&#10;C) Ranks above monetary policy&#10;D) Is not a central bank priority

Accepted Answer

Financial stability has increasingly become a priority for the Federal Reserve (Fed) and other major central banks, ranking comparably to traditional monetary policy objectives. This reflects a broader understanding that financial stability is crucial for achieving monetary policy goals such as price stability and sustainable economic growth.

Question 5

A classic banking panic resulted from&#10;A) Fractional reserve commercial banks&#10;B) Insufficient liquid assets at commercial banks to meet withdrawals&#10;C) A nervous public worried about the safety of their funds on deposit&#10;D) All of the above

Accepted Answer

Classic banking panics typically result from a combination of fractional reserve banking, where banks hold only a fraction of deposits in reserve; insufficient liquid assets to meet withdrawals, leading to a liquidity crisis; and a nervous public fearing for the safety of their deposits, which can lead to a run on the bank.

Question 6

Aggravating banking crises have been&#10;A) Uncertainties about the financial condition and liquidity of individual commercial banks&#10;B) Poorly chosen locations of banking offices&#10;C) Conflicts between state and federal regulators&#10;D) None of the above

Accepted Answer

Uncertainties about the financial condition and liquidity of individual commercial banks can indeed aggravate banking crises by undermining public confidence in the banking system, leading to runs on banks and further financial instability.

Question 7

Fire sales of assets have occurred when&#10;A) There are insufficient liquid assets at banks to meet deposit withdrawals&#10;B) Depositor runs on banks take place&#10;C) The central bank's discount window is not available&#10;D) All of the above

Accepted Answer

Fire sales of assets can occur under all the given conditions: when banks lack liquid assets to meet deposit withdrawals, during depositor runs on banks, and when the central bank's discount window is unavailable. These situations force banks to sell assets quickly, often at reduced prices, to raise cash.

Question 8

The gold standard in place at the start of the Great Depression of the 1930s&#10;A) Helped to stabilize the financial system and the economy&#10;B) Constrained the ability of the Fed to respond to the weakening financial system and economy&#10;C) Was irrelevant to the course of events during this period&#10;D) All of the above

Accepted Answer

The gold standard limited the Federal Reserve's ability to expand the money supply to stimulate the economy, as currency was backed by gold reserves. This constraint hindered efforts to combat the economic downturn.

Question 9

The Federal Deposit Insurance Corporation (FDIC) was established&#10;A) In the 1930s to assist the Fed in its conduct of monetary policy&#10;B) In the wake of the 2008-2009 financial crisis to stabilize the financial system&#10;C) In the 1930s to reduce the scope for bank runs by assuring retail depositors of the safety of their deposits&#10;D) To help stabilize the stock market by protecting retail investors in stocks

Accepted Answer

The FDIC was established in the 1930s, specifically in 1933, as a response to the thousands of bank failures that occurred in the 1920s and early 1930s. This move was aimed at restoring trust in the American banking system by insuring deposits of retail depositors, thereby reducing the likelihood of bank runs.

Question 10

Shadow banks during the 2008-2009 financial crisis included&#10;A) Money market mutual funds&#10;B) A major insurance company&#10;C) Structured investment vehicles (SIVs)&#10;D) All of the above

Accepted Answer

During the 2008-2009 financial crisis, shadow banks such as money market mutual funds, a major insurance company (like AIG), and structured investment vehicles (SIVs) played significant roles in the financial system's instability. These entities engaged in banking-like activities but were outside the traditional banking regulatory framework, contributing to the crisis.

Question 11

The Dodd-Frank Act of 2010&#10;A) Embodied the largest fiscal stimulus in U.S history&#10;B) Extended federal insurance to equity investments&#10;C) Extended federal regulation to any financial institution designated to be a systemically important financial institution&#10;D) Gave the Fed responsibility for regulating securities markets

Accepted Answer

The answer of The Dodd-Frank Act of 2010&#10;A) Embodied the...

Question 12

Recent financial crises have resulted from&#10;A) Sharp declines in asset prices&#10;B) Affected financial institutions having a mismatch between the maturity of their liabilities and the maturity of their assets&#10;C) Uncertainty about the financial condition and liquidity of important financial institutions&#10;D) All of the above

Accepted Answer

The answer of Recent financial crises have resulted from&#10;A) Sharp...

Deck 15: Financial Crises