Question 1

The TED spread is the difference between the interest rate paid on _____ and the interest rate paid on _____.

Accepted Answer

The TED spread is the difference between the interest rate paid on three-month eurodollar interbank loans and the interest rate paid on three-month Treasury bills.

Question 2

A major disruption in the financial system that impedes the economy's ability to intermediate between those who want to save and those who want to borrow and invest is called a:

Accepted Answer

A financial crisis is a major disruption in the financial system, often triggered by a specific event or series of events, that impairs the economy's ability to intermediate between savers and borrowers, thereby hindering economic growth. Examples of financial crises include the Great Depression, the 2008 global financial crisis, and the Asian financial crisis of 1997.

Question 3

Falling house prices generate widespread insolvency of financial institutions by:

Accepted Answer

Falling house prices reduce the value of collateral assets, which in turn affects the solvency of financial institutions. If the value of collateral assets falls below the value of the loans given by financial institutions, then the institutions are left with non-performing assets or bad debts, which can lead to insolvency.

Question 4

Subprime borrowers are borrowers:

Accepted Answer

Subprime borrowers have high-risk credit profiles, which means they have a history of missed payments, defaults, or bankruptcy. Lenders charge higher interest rates to compensate for the higher risk of lending to these borrowers. Therefore, option A is incorrect as subprime borrowers receive loans at higher interest rates than the prime rate. Option B is also incorrect as subprime borrowers are considered higher risk, making them less likely to make their loan payments on time. Option D is unrelated to the definition of subprime borrowers.

Question 5

The recession produced by a financial crisis:

Accepted Answer

A recession produced by a financial crisis puts further pressure on asset prices and financial institutions because it highlights the underlying issues causing the crisis, such as high levels of debt and risky investment practices. The recession can exacerbate these issues and potentially lead to further financial instability.

Question 6

A rise in the price of an asset above its fundamental value is called a(n):

Accepted Answer

A rise in the price of an asset above its fundamental value is often caused by speculation instead of underlying economic or financial factors. This type of price increase can lead to a "speculative bubble," where prices continue to climb due to investor optimism and momentum rather than true market value.

Question 7

The TED spread is an indicator of :

Accepted Answer

The TED spread measures the difference between the interest rates on interbank loans and short-term U.S. government debt, and it increases when there are concerns about the creditworthiness of banks. Therefore, the spread is a reflection of worries about the solvency of the banking system.

Question 8

The asset price that experienced a boom prior to the 2008-2009 recession in the United States was the price of:

Accepted Answer

The residential real estate market experienced a significant boom in the years leading up to the 2008-2009 recession, with house prices reaching all-time highs. This boom was fueled by easy credit and speculation, as well as other factors such as government policies that encouraged home ownership. The eventual collapse of the housing bubble contributed to the severity of the recession.

Question 9

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

Accepted Answer

A steep decline in asset prices driven by fire sales to restore liquidity can lead to a contagion effect where other financial institutions also experience a decline in the value of their assets. This can erode confidence in those institutions and lead to further withdrawals or sales, creating a domino effect.

Question 10

An asset-price bubble bursts if there is:

Accepted Answer

A bubble bursts when there is a panic cycle of asset sales and falling asset prices. This often happens when investors realize that they have been overvaluing the asset and start to sell it off, causing a domino effect of declining prices. This can lead to financial crises and economic downturns.

Question 11

Common elements of financial crises include:

Accepted Answer

Common elements of financial crises include a decline in asset prices and insolvencies of financial institutions. While insolvencies and government corruption may be factors in some financial crises, they are not necessarily common to all. Declining liquidity and low interest rates may also be factors, but are not as consistently present as asset price declines and insolvencies of financial institutions. High inflation and high interest rates are also not always present in financial crises.

Question 12

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis is called a(n):

Accepted Answer

A fire sale is a rapid sale of securities or assets at a steep discount due to the urgent need to raise capital. This often occurs during a financial crisis when institutions need to sell off assets to meet liquidity or solvency requirements. The result is a sharp drop in asset prices, which can exacerbate the crisis.

Question 13

If banks fear failure and become more conservative in making loans,then the sharp decline in bank lending is called a credit:

Accepted Answer

When banks become more conservative in making loans and are hesitant to lend, it leads to a sharp decline in bank lending, which is called a credit crunch. This can lead to economic slowdown and recession as businesses and individuals struggle to secure loans for investments and consumption. A hazard refers to potential dangers or risks, a bubble refers to a situation where prices of an asset are driven up to unsustainable levels, and a swap refers to a financial contract where two parties agree to exchange cash flows based on predetermined terms.

Question 14

An indicator of the increased lack of confidence in the banking system during the financial crisis of 2008-2009 in the United States was the:

Accepted Answer

The TED spread is the difference between the interest rate on interbank lending and the interest rate on short-term U.S. government debt. An increase in the TED spread indicates that banks are less willing to lend to each other, which is a sign of decreased confidence in the banking system. Therefore, the increased TED spread during the financial crisis of 2008-2009 was an indicator of the increased lack of confidence in the banking system.

Question 15

In the credit crunch during the 2008-2009 recession in the United States,banks tightened lending standards:

Accepted Answer

During the credit crunch in 2008-2009, banks tightened lending standards not only for mortgages but also for small business loans and consumer loans. This was a result of the overall economic downturn and the increased risk associated with lending during such uncertain times.

Question 16

To the extent that low interest rates in the years before 2008 contributed to the financial crisis of 2008-2009 in the United States,the blame for this policy lies with:

Accepted Answer

Low interest rates prior to the financial crisis were set by the Federal Reserve. The policy of keeping interest rates low encouraged banks to take on more risk and lend to subprime borrowers, ultimately contributing to the housing bubble and subsequent financial crisis. While other players such as investment banks, rating agencies, and mortgage brokers also played a role, the ultimate responsibility for setting the interest rate policy lies with the Federal Reserve.

Question 17

The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n)_____ in aggregate demand,a(n)_____ in output,and a(n)_________ in the unemployment rate.

Accepted Answer

The financial crisis of 2008-2009 caused a decrease in aggregate demand due to a decrease in consumer and business spending, which led to a decrease in output (GDP) as businesses reduced production and laid off workers, resulting in an increase in the unemployment rate.

Question 18

The mortgage defaults during the 2008-2009 financial crisis in the United States severely reduced the capital positions of:

Accepted Answer

The mortgage defaults during the 2008-2009 financial crisis in the United States led to losses for major investment banks, government-sponsored enterprises involved in the mortgage market, and a large insurance company like AIG. As a result, their capital positions were severely impacted.

Question 19

A credit crunch reduces aggregate demand by:

Accepted Answer

A credit crunch refers to a situation where banks tighten lending standards and reduce the availability of credit, making it harder for individuals and businesses to borrow money. This results in reduced consumption and investment spending, as people and firms have less access to credit to finance these activities. As a result, aggregate demand decreases, leading to a slowdown in economic growth. Options A and B may not necessarily occur in a credit crunch, while option D is a consequence rather than a cause of reduced aggregate demand.

Question 20

The housing price boom prior to the 2008-2009 recession in the United States was fueled by all of the following except:

Accepted Answer

Unusually large increases in building material costs did not contribute significantly to the housing price boom prior to the 2008-2009 recession. The boom was primarily fueled by lax lending standards, government policies promoting homeownership, and homebuyers' expectations of never-declining home prices.

Quiz 20: The Financial System

The TED spread is the difference between the interest rate paid on _ and the interest rate paid on _.

A major disruption in the financial system that impedes the economy's ability to intermediate between those who want to save and those who want to borrow and invest is called a:

Falling house prices generate widespread insolvency of financial institutions by:

Subprime borrowers are borrowers:

The recession produced by a financial crisis:

A rise in the price of an asset above its fundamental value is called a(n) :

The TED spread is an indicator of :

The asset price that experienced a boom prior to the 2008-2009 recession in the United States was the price of:

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

An asset-price bubble bursts if there is:

Common elements of financial crises include:

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis is called a(n) :

If banks fear failure and become more conservative in making loans,then the sharp decline in bank lending is called a credit:

An indicator of the increased lack of confidence in the banking system during the financial crisis of 2008-2009 in the United States was the:

In the credit crunch during the 2008-2009 recession in the United States,banks tightened lending standards:

To the extent that low interest rates in the years before 2008 contributed to the financial crisis of 2008-2009 in the United States,the blame for this policy lies with:

The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n) ___ in aggregate demand,a(n) _ in output,and a(n) _______ in the unemployment rate.

The mortgage defaults during the 2008-2009 financial crisis in the United States severely reduced the capital positions of:

A credit crunch reduces aggregate demand by:

The housing price boom prior to the 2008-2009 recession in the United States was fueled by all of the following except:

Quiz 20: The Financial System

The TED spread is the difference between the interest rate paid on _____ and the interest rate paid on _____.

A major disruption in the financial system that impedes the economy's ability to intermediate between those who want to save and those who want to borrow and invest is called a:

Falling house prices generate widespread insolvency of financial institutions by:

Subprime borrowers are borrowers:

The recession produced by a financial crisis:

A rise in the price of an asset above its fundamental value is called a(n) :

The TED spread is an indicator of :

The asset price that experienced a boom prior to the 2008-2009 recession in the United States was the price of:

One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:

An asset-price bubble bursts if there is:

Common elements of financial crises include:

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis is called a(n) :

If banks fear failure and become more conservative in making loans,then the sharp decline in bank lending is called a credit:

An indicator of the increased lack of confidence in the banking system during the financial crisis of 2008-2009 in the United States was the:

In the credit crunch during the 2008-2009 recession in the United States,banks tightened lending standards:

To the extent that low interest rates in the years before 2008 contributed to the financial crisis of 2008-2009 in the United States,the blame for this policy lies with:

The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n) _____ in aggregate demand,a(n) _____ in output,and a(n) _________ in the unemployment rate.

The mortgage defaults during the 2008-2009 financial crisis in the United States severely reduced the capital positions of:

A credit crunch reduces aggregate demand by:

The housing price boom prior to the 2008-2009 recession in the United States was fueled by all of the following except:

The TED spread is the difference between the interest rate paid on _ and the interest rate paid on _.

The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n) ___ in aggregate demand,a(n) _ in output,and a(n) _______ in the unemployment rate.