Question 1

Past centuries witnessed two important stock price bubbles.The first one occurred between ________,and the second one occurred between ________.

Accepted Answer

The first major stock price bubble mentioned occurred between 1927 and 1929, leading up to the Great Depression. The second significant bubble occurred between 1996 and 2000, often referred to as the Dot-com Bubble.

Question 2

The common feature of the Great Depression and the Global Economic Crisis is

Accepted Answer

Both the Great Depression and the Global Economic Crisis were preceded by an asset price bubble. In the 1920s, there was a stock market bubble, and in the 2000s, there was a housing bubble. This led to an unsustainable increase in asset prices, which eventually burst and triggered the respective economic crises. While government and the FED played active roles, it was the asset price bubble that set the stage for both crises.

Question 3

Securitization is

Accepted Answer

Securitization is the process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments. These new financial instruments are backed by the pool of underlying assets and provide investors with a way to invest in the underlying assets without having to buy the assets themselves. This process is often used to create mortgage-backed securities (MBS) or collateralized debt obligations (CDOs).

Question 4

In addition to being subject to the Fed's reserve requirements,the banks are also required to maintain a capital requirement,which is

Accepted Answer

The capital requirement is the minimum amount of equity that a bank must hold in relation to its total assets. It is expressed as a ratio of equity to assets, typically around 8%. This serves as a buffer to protect depositors and the banking system from losses.

Question 5

The main differences between the bank and the nonbank institutions include all of the following EXCEPT

Accepted Answer

The statement that "banks' balance sheets include assets and liabilities while nonbank institutions' balance sheets include only liabilities" is incorrect. Nonbank institutions also have assets listed on their balance sheets, but they generally rely more on borrowing to finance their investments rather than attracting deposits like banks do. The other three statements are correct differences between banks and nonbank institutions.

Question 6

The ratio of the liabilities of a financial institution to equity capital is called

Accepted Answer

The ratio of liabilities to equity capital is commonly known as leverage. It measures the extent to which a financial institution is funding its assets through borrowed money.

Question 7

The process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments is called

Accepted Answer

The process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments is called securitization. This process allows institutions to transfer risk and raise capital by selling these financial instruments to investors.

Question 8

Referring to a bank's t-account,equity refers to

Accepted Answer

Equity represents the residual interest in the assets of the bank after deducting its liabilities. Therefore, it is the difference between the total assets and total liabilities.

Question 9

The securities,such as stocks or bonds,constitutes a(n)________ for the borrowers and a (n)________ for the saver.

Accepted Answer

Securities like stocks or bonds represent a liability for the borrower because they are obligated to return the investors' funds or pay dividends/interest. For the saver or investor, these securities are an asset because they represent an investment that can generate returns.

Question 10

Referring to a bank's t-account,the difference between total assets and total liabilities is called

Accepted Answer

The difference between total assets and total liabilities on a bank's t-account is called equity, which represents the bank's net worth or owner's equity.

Question 11

Leverage refers to

Accepted Answer

Leverage refers to how much debt a company uses to finance its assets. In finance, leverage is measured by the ratio of liabilities to equity. Therefore, choice B is the correct answer as it measures the ratio of the liabilities of a financial institution to equity capital.

Question 12

The securities,such as stocks or bonds,constitute a(n)________ for the savers and a(m)________ for the borrowers.

Accepted Answer

Securities like stocks or bonds are considered assets for savers because they represent an investment that can appreciate in value. For borrowers, these securities are liabilities because they represent an obligation to return the borrowed funds or pay dividends/interest.

Question 13

According to Gordon,the three main ingredients in the recent U.S.housing bubble are

Accepted Answer

The three main ingredients in the recent U.S. housing bubble as identified by Gordon were low interest rates, saving glut, and financial innovation. High interest rates and lack of savings were not contributing factors to the bubble, whereas the other two options do not have any mention in Gordon's analysis.

Question 14

Bank equity is also referred to as

Accepted Answer

Bank equity is the amount of money that the owners of the bank have invested in the bank. It is also referred to as bank capital. Bank reserves are the amount of money that a bank holds in reserve to meet its obligations. Bank deposits are funds that are deposited into a bank by customers. Bank assets are the resources that a bank owns, such as loans, cash, and investments.

Question 15

The average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate is called

Accepted Answer

The average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate is called term premium. This premium is the compensation that investors receive for holding long-term bonds instead of short-term bonds. It reflects the risk of inflation and interest rate fluctuations that long-term bonds are exposed to. Choices A, C, and D are not appropriate descriptions of this premium.

Question 16

In the IS-LM Model,assuming downward sloping IS curve and upward sloping LM curve;increase in consumers' wealth is going to

Accepted Answer

An increase in consumers' wealth would lead to an increase in consumption, leading to a rightward shift of the IS curve. This is because the IS curve represents the equilibrium in the goods market, and an increase in consumption would increase demand for goods and services, leading to an increase in output and income at each interest rate. The LM curve represents the equilibrium in the money market, and an increase in consumers' wealth would not directly affect the supply and demand of money, which determines the interest rate. Therefore, the LM curve would not shift.

Question 17

According to Gordon,all of the following are important ingredients in the recent U.S.housing bubble EXCEPT

Accepted Answer

According to Gordon, the important ingredients in the recent U.S. housing bubble are low interest rates, saving glut, and financial innovation. However, trade deficit is not mentioned as a contributing factor to the housing bubble.

Question 18

In the IS-LM model,assuming downward sloping IS curve and upward sloping LM curve,reduction in consumers' wealth is going to

Accepted Answer

A reduction in consumers' wealth is likely to reduce their spending, which will cause a leftward shift of the IS curve. This is because the IS curve represents the combination of interest rates and output levels at which aggregate demand equals output. When consumer spending drops, the level of output demanded at every interest rate falls, causing a leftward shift in the curve. The LM curve would remain unchanged because it represents the combination of interest rates and output levels at which the supply of money equals the demand for money.

Question 19

The ratio of bank's equity to its total assets is called

Accepted Answer

Capital requirements refer to the minimum amount of capital a bank must hold in relation to its overall assets. This is a regulatory measure to ensure banks can absorb a reasonable amount of loss and complies with statutory Capital Adequacy Norms.

Question 20

Price bubble occurs when

Accepted Answer

A price bubble occurs when the price of an asset (such as a stock or real estate) rises to a level that is far above its intrinsic value or underlying fundamentals, such as the company's earnings or a property's rental income. This creates a situation where the price becomes detached from the underlying value, leading to the risk of a sharp decline or crash.

Quiz 5: Financial Markets, financial Regulation, and Economic Instability

Past centuries witnessed two important stock price bubbles.The first one occurred between ,and the second one occurred between .

The common feature of the Great Depression and the Global Economic Crisis is

Securitization is

In addition to being subject to the Fed's reserve requirements,the banks are also required to maintain a capital requirement,which is

The main differences between the bank and the nonbank institutions include all of the following EXCEPT

The ratio of the liabilities of a financial institution to equity capital is called

The process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments is called

Referring to a bank's t-account,equity refers to

The securities,such as stocks or bonds,constitutes a(n) for the borrowers and a (n) for the saver.

Referring to a bank's t-account,the difference between total assets and total liabilities is called

Leverage refers to

The securities,such as stocks or bonds,constitute a(n) for the savers and a(m) for the borrowers.

According to Gordon,the three main ingredients in the recent U.S.housing bubble are

Bank equity is also referred to as

The average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate is called

In the IS-LM Model,assuming downward sloping IS curve and upward sloping LM curve;increase in consumers' wealth is going to

According to Gordon,all of the following are important ingredients in the recent U.S.housing bubble EXCEPT

In the IS-LM model,assuming downward sloping IS curve and upward sloping LM curve,reduction in consumers' wealth is going to

The ratio of bank's equity to its total assets is called

Price bubble occurs when

Quiz 5: Financial Markets, financial Regulation, and Economic Instability

Past centuries witnessed two important stock price bubbles.The first one occurred between ________,and the second one occurred between ________.

The common feature of the Great Depression and the Global Economic Crisis is

Securitization is

In addition to being subject to the Fed's reserve requirements,the banks are also required to maintain a capital requirement,which is

The main differences between the bank and the nonbank institutions include all of the following EXCEPT

The ratio of the liabilities of a financial institution to equity capital is called

The process of combining many different debt instruments like home mortgages into a pool of hundreds of thousands of individual contracts and then selling new financial instruments is called

Referring to a bank's t-account,equity refers to

The securities,such as stocks or bonds,constitutes a(n) ________ for the borrowers and a (n) ________ for the saver.

Referring to a bank's t-account,the difference between total assets and total liabilities is called

Leverage refers to

The securities,such as stocks or bonds,constitute a(n) ________ for the savers and a(m) ________ for the borrowers.

According to Gordon,the three main ingredients in the recent U.S.housing bubble are

Bank equity is also referred to as

The average difference over a long period of the interest rate on long-term bonds and the interest rate on the short-term federal funds rate is called

In the IS-LM Model,assuming downward sloping IS curve and upward sloping LM curve;increase in consumers' wealth is going to

According to Gordon,all of the following are important ingredients in the recent U.S.housing bubble EXCEPT

In the IS-LM model,assuming downward sloping IS curve and upward sloping LM curve,reduction in consumers' wealth is going to

The ratio of bank's equity to its total assets is called

Price bubble occurs when

Past centuries witnessed two important stock price bubbles.The first one occurred between ,and the second one occurred between .

The securities,such as stocks or bonds,constitutes a(n) for the borrowers and a (n) for the saver.

The securities,such as stocks or bonds,constitute a(n) for the savers and a(m) for the borrowers.