Question 1

Assume that a bank has $1 in capital from the its owners, and $19 in deposits from depositors that it loans out completely. What is the leverage ratio and what is the value of the leverage ratio in this case? Assume that the value of the bank's assets falls by 10 percent. Is the bank solvent or not? As a depositor, will you leave your deposits with the bank?

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Question 2

What were the mistakes of the following parties that eventually led to the U.S. recession of 2008-2009?
a. Homebuyers
b. Government policymakers
c. Investment banks

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Question 3

What was the effect of the U.S. recession of 2008-2009 on output and prices? Give one example of conventional monetary policies and fiscal policies used by the U.S. government to fix the problem.

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Question 4

Use the aggregate demand-aggregate supply model to graphically illustrate the impact of a financial crisis on output and prices in an economy in the short run. Explain the factors that cause changes from the initial equilibrium to the new short-run equilibrium.

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Question 5

Provide specific examples from the 2008-2009 U.S. financial crisis of each of the five stages of a financial crisis:
a.asset-price booms and busts
b.insolvencies of financial institutions
c.falling confidence in the financial system
d.credit crunch
e.recession

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Question 6

By definition, "shadow banks are a diverse set of financial institutions that perform some functions similar to banks, but do so outside the regulatory system that applies to traditional banking." In the U.S. recession of 2008, the U.S. government financially rescued many shadow banks. Was this a moral hazard? If yes, then why did the government do this?

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Question 7

Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio of 10. Explain the meaning of these ratios and what would happen to each of these banks if the value of their assets fell by 6 percent.

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Question 8

What are the benefits of a well-functioning financial system? What are the costs of a financial crisis?

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Question 9

"A fire-sale can make illiquid institutions insolvent." Explain how.

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Question 10

Why was the U.S. recession of 2008-2009 sometimes also referred as the "subprime crisis"?

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Question 11

Provide one argument in favour of and one argument against each of the following proposals to prevent future financial crises.
a.require shadow banks to hold more capital
b.give the CDIC resolution authority over shadow banks
c.impose higher capital requirements on larger banks
d.prohibit banks from making speculative investments

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Question 12

What is the difference between systematic and idiosyncratic risk? Which type of risk can be almost eliminated through diversification?

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Quiz 18: The Financial System: Opportunities and Dangers

What were the mistakes of the following parties that eventually led to the U.S. recession of 2008-2009? a. Homebuyers b. Government policymakers c. Investment banks