Question 1

The Wall Street Reform and Consumer Protection Act, also called Dodd-Frank, was passed in the 1930s to correct the problems that led to the Great Depression.

Accepted Answer

The Wall Street Reform and Consumer Protection Act, also known as Dodd-Frank, was actually passed in 2010 in response to the 2008 financial crisis. The laws passed in the 1930s to address the Great Depression were the Glass-Steagall Act and the Securities Act of 1933.

Question 2

Using gold as an example, what is the difference between commodity money and commodity-backed money?

Accepted Answer

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Question 3

If professional basketball superstar LeBron James signed his jersey and gave it to you, it would certainly be a valuable asset. Why would this valuable asset not serve as a very good form of money if you took it to a shopping mall, looking to purchase a pair of shoes? Use the three roles of money in your explanation.

Accepted Answer

The answer of If professional basketball superstar LeBron James signed...

Question 4

The Wall Street Reform and Consumer Protection Act established a government committee with the right to regulate "systemically important" nonbank financial institutions as if they were banks.

Accepted Answer

The Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act, established the Financial Stability Oversight Council (FSOC) with the authority to designate certain nonbank financial companies as "systemically important" and subject them to regulation and oversight similar to that of banks.

Question 5

The TED spread is the interest rate that banks pay when they borrow reserves from the Fed or another bank.

Accepted Answer

The TED spread is the difference between the interest rate on interbank loans and the risk-free rate (usually the U.S. Treasury yield). It is used as a measure of perceived credit risk in the financial system.

Question 6

When the government injected capital into banks during the 2008 financial crisis, it was buying bonds issued by the troubled banks.

Accepted Answer

When the government injected capital into banks during the 2008 financial crisis, it was buying preferred stock in the troubled banks, not bonds.

Question 7

A vicious cycle of deleveraging occurs when sales of assets to cover losses produce negative balance sheet effects on other firms, causing creditors to call in their loans, which forces further sales of assets and further decreases in prices.

Accepted Answer

This is the correct definition of a vicious cycle of deleveraging.

Question 8

Explain how money adds to welfare although it does not directly produce anything.

Accepted Answer

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Question 9

Most of the subprime loans were made by loan originators, who sold the loans to other investors for securitization.

Accepted Answer

This is true. Loan originators made the majority of subprime loans and then sold them off to other investors for securitization.

Question 10

A high TED spread means that banks expect they are taking on a high level of risk when they lend to each other.

Accepted Answer

The TED spread is a measurement of the difference between the interbank lending rate (LIBOR) and the risk-free rate (T-bill rate). When the TED spread is high, it indicates that banks are hesitant to lend to each other, usually due to perceived high risk in the financial markets.

Question 11

During the financial crisis of 2008, the Treasury Department prevented the failure of Bear Stearns investment bank and AIG insurance company because they were considered too important to the economy to fail.

Accepted Answer

The Treasury Department did indeed prevent the failure of Bear Stearns and AIG in order to prevent further damage to the economy during the financial crisis of 2008.

Question 12

Shares in the pools of securitized mortgages proved to be very safe investments, since large numbers of defaults on mortgages did not occur at the same time.

Accepted Answer

This statement is false. The securitization of mortgages played a significant role in the 2008 financial crisis, as many mortgage-backed securities defaulted at the same time.

Question 13

What is a bank run, how can it begin, and why is it dangerous for the greater economy?

Accepted Answer

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Question 14

Suppose you take $100 in cash to the bank and make a deposit in your checking account. Making small talk, you ask the teller, "Do you make money here?" A little surprised, the teller responds, "Of course not; only the U.S. Treasury makes money." Is the teller correct or incorrect? Explain.

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Question 15

Subprime lending takes place at below-prime interest rates.

Accepted Answer

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Question 16

In securitization a pool of loans is assembled and shares of that pool are sold to investors.

Accepted Answer

This is the basic concept of securitization, where a pool of loans is packaged together and sold as securities to investors.

Question 17

The U.S. economy recovered from the 2001 recession primarily because low interest rates caused a boom in the housing market.

Accepted Answer

The Federal Reserve lowered interest rates in response to the 2001 recession, which led to a surge in housing demand and home construction. This helped to stimulate economic growth and ultimately contributed to the recovery from the recession. However, other factors such as increased government spending and a rebound in business investment also played a role in the recovery.

Question 18

It's your birthday, and your uncle opens up his wallet and gives you a $20 bill. You take the $20 and deposit it in your checking account. What is the effect of this transaction on M1 or M2? Explain.

Accepted Answer

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Question 19

The purpose of the Bureau of Consumer Financial Protection is to prevent exploitation of borrowers through complicated financial deals that were made to appear attractive to them.

Accepted Answer

The Bureau of Consumer Financial Protection was established to prevent unfair, deceptive, and abusive practices in the consumer financial marketplace and protect consumers from exploitation by financial institutions.

Question 20

It's your birthday, and your uncle opens up his wallet and gives you a $20 gift card to the local movie theater. You take the $20 gift card and use it to watch a movie and buy some popcorn and soda. What is the effect of this transaction on M1 or M2? Explain.

Accepted Answer