Q&A Hero

Q: Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of A. fraudulent claims. B. moral hazard. C. adverse selection. D. pecuniary purchases.

Q: When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of A. fraudulent claims. B. moral hazard. C. adverse selection. D. pecuniary purchases.

Q: Only ________ can issue monoline insurance policies. A. life insurance companies B. insurance companies that issue multiple types of insurance C. property insurance companies D. insurance companies that specialize in credit insurance alone

Q: The type of credit insurance that landed AIG into trouble in 2008 is called A. insurance rate swaps. B. monoline insurance. C. default insurance. D. credit default swaps.

Q: In response to banks entering into the insurance business, insurance companies have started to supply ________ insurance. A. debt B. credit C. equity D. currency

Q: A Supreme Court ruling in March 1996 held that A. state laws to prevent banks from selling insurance can be superseded by federal rulings from banking regulators that allow banks to sell insurance. B. state laws to prevent banks from selling insurance cannot be superseded by federal rulings from banking regulators that allow banks to sell insurance. C. state laws to prevent banks from selling insurance can be superseded only if Congress enacts legislation that allow banks to sell insurance. D. state laws to prevent banks from selling insurance cannot be superseded by federal legislation.

Q: In recent years, bank regulatory authorities have A. encouraged banks to enter the insurance field. B. discouraged banks from entering the insurance field. C. asked Congress to write new legislation that would make it illegal for banks to enter the insurance field. D. asked Congress to write new legislation that would make it legal for banks to enter the insurance field.

Q: The specialty of Lloyd's of London is A. annuities. B. hedge funds. C. mutual funds. D. reinsurance.

Q: Insurance companies reduce risk exposure in exchange for a portion of their insurance premiums by obtaining A. government loan guarantees. B. federal insurance. C. reinsurance. D. bankers acceptances.

Q: Reinsurance allows ________ to reduce the risks of exposure by allocating a portion of the risk to ________ in exchange for a portion of the premium. A. insurance companies; another insurance company B. insurance companies; the insured C. the insured; the insurance company D. the insured; a bank

Q: Relative to life insurance companies, property and casualty insurance companies hold A. more liquid assets. B. more long-term government bonds. C. more commercial mortgages. D. fewer municipal bonds.

Q: Property and casualty insurance companies are organized A. both as stock and mutual companies. B. only as stock companies. C. only as mutual companies. D. primarily as cooperatives.

Q: Property and casualty insurance companies hold the largest share of their assets in A. long-term government bonds. B. short-term government securities and commercial paper. C. tax-exempt municipal bonds and U.S. government securities. D. medium-term corporate bonds.

Q: The key factor causing life insurance companies to move into the management of pension funds was A. the investment expertise of insurance companies. B. a request for this change by managers of pension funds. C. a change in state laws. D. a change in federal legislation in 1974 to encourage pension funds to turn fund management over to life insurance companies.

Q: A contract requiring payment of an annual premium in exchange for the payment of a future stream of payments beginning at a specified age and continuing until death is A. whole life insurance. B. an annuity. C. term life insurance. D. variable life insurance. E. universal life insurance.

Q: An example of permanent insurance is ________ insurance, and an example of temporary insurance is ________ insurance. A. term; variable life B. whole life; variable life C. whole life; term D. term; whole life

Q: The life insurance industry's share of total financial intermediary assets fell from 15.3% at the end of 1970 to 11.5% at the end of 1980 because of A. poor investment returns in the 1970s. B. widespread failures of life insurance companies. C. federal regulations limiting the sale of life insurance. D. unpredictability of payouts.

Q: Life insurance companies are regulated by state governments because A. they have never experienced bankruptcy. B. they have never experienced profitability. C. they have never experienced widespread failures. D. they hold only highly liquid assets.

Q: Which of the following is true of life insurance companies? A. Typically the type of assets that life insurance companies hold are corporate bonds, commercial mortgages, and corporate stock. B. The two typical forms of life insurance polices that are held can be classified as whole and variable life policies. C. The major risk that life insurance companies face is that payouts to policy holders are very hard to predict. D. Life insurance companies have suffered from wide spread failures.

Q: The regulatory agency responsible for regulating the activities of life insurance companies is A. the FDIC. B. the Fed. C. the FHLBS. D. the appropriate state agency where the company is operating.

Q: ________ are asymmetric information problems that act as a barrier to efficient allocation of capital. A. Asset prices B. Credit imbalances C. Financial frictions D. Financial derivatives

Q: A serious consequence of a financial crisis is A. a contraction in economic activity. B. an increase in asset prices. C. financial engineering. D. financial globalization.

Q: A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A. causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B. allows for a more efficient use of funds. C. increases economic activity. D. reduces uncertainty in the economy and increases market efficiency.

Q: A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A. financial crisis. B. fiscal imbalance. C. free-rider problem. D. "lemons" problem.

Q: The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could A. choke off financial innovation. B. increase the efficiency of the financial system. C. increase economic growth. D. increase international financial integration.

Q: Dodd-Frank addressed many of the issues that led to the financial crisis. Which of the following was NOT addressed by Dodd-Frank regulations? A. stricter consumer protection laws B. privately owned, government-sponsored enterprises (GSEs) such as Fannie mae and Freddie Mac C. resolution authority over the large financial institutions D. higher requirements on firms dealing in derivatives

Q: One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. A. less; more B. more; no C. more; less D. less; no

Q: One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under A. Glass-Steagall. B. McFadden. C. the Edge Act. D. the Federal Reserve Act.

Q: The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the A. Resolution Trust Authority. B. Board of Governors. C. Financial Stability Oversight Council. D. Macroprudential Supervisory Agency.

Q: The Volcker Rule addresses the off-balance-sheet problem involving A. trading risks. B. selling loans. C. loan guarantees. D. interest rate risks.

Q: Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT A. higher capital standards. B. stricter liquidity requirements. C. providing a plan for orderly liquidation if necessary. D. interest rate ceilings on time deposits.

Q: The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A. $40,000. B. $100,000. C. $200,000. D. $250,000.

Q: The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within A. the Treasury Department. B. the Federal Reserve. C. the SEC. D. the IRS.

Q: In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT A. verify the income of the borrower. B. verify the borrower's job status. C. check the credit history of the borrower. D. verify that the borrower can read and understand a loan contract.

Q: Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn. A. increase; decrease B. increase; increase C. decrease; increase D. decrease; decrease

Q: Microprudential supervision does all of the following EXCEPT A. checking capital ratios of a bank. B. checking a bank's compliance with disclosure requirements. C. assessing the riskiness of an individual bank's activities. D. focusing on financial system liquidity.

Q: Microprudential supervision focuses on the safety and soundness of A. individual financial institutions. B. the financial system as a whole. C. the shadow banking system. D. government credit agencies.

Q: The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the A. temporary decrease in the federal deposit insurance limit. B. sale of new subprime mortgage assets. C. borrowing of $150 million from AIG. D. Troubled Asset Relief Program (TARP).

Q: The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. A. currency devaluation B. budget surplus C. sovereign debt crisis D. tax cut

Q: Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A. Lehman Brothers B. Merrill Lynch C. Bear Stearns D. Goldman Sachs

Q: Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A. Europe. B. Australia. C. China. D. South America.

Q: As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral. A. less B. no C. more D. default-free

Q: If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A. 5%. B. 10%. C. 20%. D. 50%.

Q: When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A. the value of the house fell below the amount of the mortgage. B. the basement flooded since they could not afford to fix the leaky plumbing. C. the roof leaked during a rainstorm. D. the amount that they owed on their mortgage was less than the value of their house.

Q: The growth of the subprime mortgage market led to A. increased demand for houses and helped fuel the boom in housing prices. B. a decline in the housing industry because of higher default risk. C. a decrease in home ownership as investors chose other assets over housing. D. decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.

Q: Agency problems in the subprime mortgage market included all of the following EXCEPT A. homeowners could refinance their houses with larger loans when their homes appreciated in value. B. mortgage originators had little incentives to make sure that the mortgagee is a good credit risk. C. underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D. the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.

Q: If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A. severe adverse selection problem. B. decline in mortgage applications. C. call to deregulate the industry. D. decrease in the demand for houses.

Q: The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A. principal-agent B. debt deflation C. democratization of credit D. collateralized debt

Q: A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets. A. collateralized debt obligation (CDO) B. adjustable-rate mortgage C. negotiable CD D. discount bond

Q: ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A. Securitization B. Origination C. Debt deflation D. Distribution

Q: Typically, the economy recovers fairly quickly from a recession. Why did this NOT happen in the United States during the Great Depression?

Q: The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. A. credit boom B. credit spread C. adjustable-rate D. default swap

Q: The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A. debt deflation B. illiquidity C. an improvement in banks' balance sheets D. increases in bond prices

Q: A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________. A. asset price declines; banking crises; unanticipated decline in price level B. unanticipated decline in price level; banking crises; increase in interest rates C. banking crises; increase in interest rates; unanticipated decline in price level D. banking crises; increase in uncertainty; increase in interest rates

Q: A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A. debt deflation. B. moral hazard. C. insolvency. D. illiquidity.

Q: Debt deflation occurs when A. an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B. rising interest rates worsen adverse selection and moral hazard problems. C. lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D. corporations pay back their loans before the scheduled maturity date.

Q: In a bank panic, the source of contagion is the A. free-rider problem. B. too-big-to-fail problem. C. transactions cost problem. D. asymmetric information problem.

Q: If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A. banking crisis. B. financial recovery. C. reduction of the adverse selection and moral hazard problems. D. increase in information available to investors.

Q: Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution. A. high uncertainty B. low interest rates C. low asset prices D. high financial regulation

Q: When asset prices rise above their fundamental economic values, a(n) ________ occurs. A. asset-price bubble B. liability war C. decline in lending D. decrease in moral hazard

Q: When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A. a contraction of economic activity. B. an economic boom. C. an increased opportunity for growth. D. a call for government regulation.

Q: When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A. deleveraging. B. releveraging. C. capitulation. D. deflation.

Q: When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A. credit boom. B. credit bust. C. deleveraging. D. market race.

Q: Financial crises in advanced economies might start from a A. debt deflation. B. currency crisis. C. mismanagement of financial innovations. D. currency mismatch.

Q: Discuss three ways in which U.S. banks can become involved in international banking.

Q: Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks in the U.S. has been A) reduced. B) mildly expanded. C) completely eliminated. D) greatly expanded.

Q: Foreign banks may engage in banking activities in the United States by opening all of the following EXCEPT A) an agency office of the foreign bank. B) a subsidiary U.S. bank. C) a branch of the foreign bank. D) a McFadden Corporation.

Q: If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is A) subject to the same regulations as a U.S. owned bank. B) only subject to the regulations of the country in which the foreign bank is chartered. C) restricted to making loans to only foreign citizens in the U.S. D) restricted to accepting deposits from foreign citizens living in the U.S.

Q: ________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents. A) An agency office B) A universal corporation C) A McFadden corporation D) A Basel branch

Q: ________ within the U.S. can make loans to foreigners but cannot make loans to domestic residents. A) Edge Act corporations B) International Banking Facilities C) Universal banks D) Euro banks

Q: A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. A) Edge Act corporation B) Eurodollar agency C) universal bank D) McFadden corporation

Q: U.S. banks have most of their branches in A) Latin America, the Far East, the Caribbean, and London. B) Latin America, the Middle East, the Caribbean, and London. C) Mexico, the Middle East, the Caribbean, and London. D) South America, the Middle East, the Caribbean, and Canada.

Q: An advantage to American banks from operating foreign branches is that Eurodollar deposits in offshore branches are A) not subject to reserve requirements. B) insured by the FDIC. C) subject to extensive regulatory supervision. D) all demand deposits that pay no interest.

Q: Reasons for holding Eurodollars include A) the fact that Eurodollar deposits are insured by the FDIC. B) the fact that dollars are widely used to conduct international transactions. C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers. D) the fact that Eurodollar deposits are heavily regulated.

Q: Eurodollars are A) dollar-dominated deposits held in banks outside the United States. B) deposits held by U.S. banks in Europe. C) deposits held by U.S. banks in foreign countries. D) dollar-dominated deposits held in U.S. banks by Europeans.

Q: The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York.

Q: Deposits in European banks denominated in dollars for the purpose of international transactions are known as A) Eurodollars. B) European Currency Units. C) European Monetary Units. D) International Monetary Units.

Q: What country is given credit for the birth of the Eurodollar market? A) the United States B) England C) the Soviet Union D) Japan

Q: The spectacular growth in international banking can be explained by A) the rapid growth in international trade. B) the 1988 Basel Agreement. C) the collapse of the Bretton Woods system. D) the creation of the World Trade Organization.

Q: ________ are the only depository institutions that are tax-exempt.A) Commercial banksB) Savings and loansC) Mutual savings banksD) Credit unions