Question 1

The government bailed out banks deemed too big to fail through all of the followings except:

Accepted Answer

A)   increased government spending.
B)   fiscal policy.
C)   the Troubled Asset Relief Program, commonly known as TARP.
D)   breaking them to several entities.E) C) and D)
F) A) and B)

Question 2

One reason the housing bubble occurred is because:

Accepted Answer

A)   the recency effect caused homes to typically be undervalued.
B)   the herd instinct caused everyone to believe home prices would continue to fall.
C)   securitization removed much of the risk from the sellers of subprime mortgages.
D)   All of these statements are true.E) B) and C)
F) None of the above

Question 3

A bubble is defined to be when:

Accepted Answer

A)   an asset is not being traded very heavily.
B)   financial advisors purposely trying to deceive the public and sell a worthless asset.
C)   when the financial markets are trading an asset at much higher than historically justifiable prices.
D)   there are a limited number of buyers of an asset which causes the market to crash.E) A) and B)
F) None of the above

Question 4

Subprime mortgages are mortgage loans:

Accepted Answer

A)   made to borrowers with low credit scores.
B)   that have less than prime interest rates.
C)   made to borrowers with higher than average credit scores.
D)   made at lower than general market interest rates.E) None of the above
F) C) and D)

Question 5

As the housing market took off in the early 2000s:

Accepted Answer

A)   household debt became positive for the first time since the Great Depression.
B)   the growth in household debt slowed.
C)   the growth in household debt accelerated.
D)   household debt became negative for the first time since the Great Depression.E) None of the above
F) B) and C)

Question 6

In events leading to the housing bubble, the credit-rating agencies rated the assets associated with the housing market proper:

Accepted Answer

A)   mid-level ratings indicating moderate risk, but were ignored.
B)   AAA ratings indicating low risk, but turned out to be a right judgment.
C)   AAA ratings indicating low risk, and turned out to be too optimistic.
D)   mid-level ratings indicating moderate risk, and turned out to be too pessimistic.E) B) and D)
F) C) and D)

Question 7

Before it went bankrupt in 2008, Lehman Brothers investment bank had a leverage ratio of 30 which meant it was:

Accepted Answer

A)   highly hedged.
B)   in debt more than it was worth.
C)   highly leveraged.
D)   not very leveraged.E) B) and C)
F) A) and C)

Question 8

How did the collapse of the housing bubble cause a contraction in output?

Accepted Answer

A)   Because banks were unwilling to lend, many businesses were suddenly unable to access credit for their day-to-day needs.
B)   When homeowners lost value in their homes, they stopped saving, which reduced banks' ability to lend.
C)   Because consumers lost confidence in the banking industry, they stopped depositing money, so banks could no longer lend.
D)   When banks wanted to make loans, but couldn't find any credit-worthy customers to loan to.E) B) and C)
F) C) and D)

Question 9

If you lost 10 percent on $200 worth of stock in a 2x margin account, then you would:

Accepted Answer

A)   lose $20.
B)   gain $20.
C)   lose $40.
D)   gain $40.E) A) and B)
F) C) and D)

Question 10

The stock market crash of 1929 led to:

Accepted Answer

A)   the South Seas bubble burst.
B)   the Great Depression.
C)   the Great Recession.
D)   Black Thursday.E) B) and C)
F) A) and D)

Question 11

The first recorded example of a financial bubble was:

Accepted Answer

A)   called the Enclosure Movement.
B)   the "dot com" bubble of the 1990s.
C)   a "tulip mania" in the 1600s.
D)   the "stock market" bubble of the 1920s.E) C) and D)
F) B) and C)

Question 12

In events leading to the collapse of the housing bubble, inflated home values caused consumers to:

Accepted Answer

A)   save less and spend more.
B)   spend less and save more.
C)   spend more on homes and less on all other goods.
D)   hold their savings to equity in their homes and stop saving more liquid forms of assets.E) A) and B)
F) B) and C)

Question 13

The Federal Reserve Bank can ____________ and the government can ___________ to stimulate aggregate demand in the economy.

Accepted Answer

A)   lower interest rates; increase spending
B)   increase interest rates; decrease spending
C)   increase interest rates; increase spending
D)   lower interest rates; decrease spendingE) B) and C)
F) A) and B)

Question 14

In finance, leverage is using:

Accepted Answer

A)   borrowed money to pay for investments.
B)   the equity one owns to pay for investments planned in the future.
C)   predicted earnings to pay for current investments.
D)   forecasted future earnings to pay for current loans.E) A) and D)
F) C) and D)

Question 15

If you lost 50 percent on $100 worth of stock in a 3x margin account, then you would lose:

Accepted Answer

A)   $50.
B)   $150.
C)   $300.
D)   $600.E) A) and B)
F) A) and C)

Question 16

Securitization is the practice of:

Accepted Answer

A)   packaging individual debts into a single uniform asset that can be easily bought and sold.
B)   the government guaranteeing repayment of risky home loans made to individuals with lower credit.
C)   borrowing based on expected future earnings.
D)   backing a security with a riskless asset.E) All of the above
F) A) and D)

Question 17

The widespread fall in the prices of homes caused consumers to:

Accepted Answer

A)   decrease their spending, as they struggled to pay back debt.
B)   increase their spending, as they devoted their money to things other than homes.
C)   decrease their spending, and increase their debts.
D)   increase their spending, as saving was viewed as a bad investment.E) A) and C)
F) A) and B)

Question 18

Financial markets are:

Accepted Answer

A)   in many ways the purest expression of the market mechanism.
B)   a powerful tool for the efficient allocation of scarce resources.
C)   a global marketplace where sophisticated investors make billion-dollar decisions.
D)   All of these statements are true.E) B) and C)
F) B) and D)

Question 19

As the housing bubble began to collapse, the wave of initial foreclosures led to:

Accepted Answer

A)   banks no longer offering refinancing as an option, and home sales slowed.
B)   more foreclosures due to the herd instinct.
C)   more household saving in other forms.
D)   banks flooding the market with homes for sale, further depressing their price.E) A) and B)
F) None of the above

Question 20

The practice of securitization of mortgages:

Accepted Answer

A)   pooled high-risk mortgages together, which raised the prices of them to investors.
B)   allowed investors to profit from the mortgage payments without being exposed to any risk.
C)   pooled the risk of mortgages, allowing higher risk mortgages to be more safely sold to investors.
D)   was undertaken by government to guarantee the values of real estate.E) None of the above
F) A) and D)

Exam 17: Financial Crisis

The stock market crash of 1929 led to:

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Securitization is the practice of:

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Subprime mortgages are mortgage loans:

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Financial markets are:

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The first recorded example of a financial bubble was:

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One reason the housing bubble occurred is because:

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In events leading to the housing bubble, the credit-rating agencies rated the assets associated with the housing market proper:

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The government bailed out banks deemed too big to fail through all of the followings except:

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In events leading to the collapse of the housing bubble, inflated home values caused consumers to:

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How did the collapse of the housing bubble cause a contraction in output?

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If you lost 10 percent on $200 worth of stock in a 2x margin account, then you would:

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The widespread fall in the prices of homes caused consumers to:

Correct AnswerverifiedShow Answer

A bubble is defined to be when:

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The Federal Reserve Bank can ____________ and the government can ___________ to stimulate aggregate demand in the economy.

Correct AnswerverifiedShow Answer

If you lost 50 percent on $100 worth of stock in a 3x margin account, then you would lose:

Correct AnswerverifiedShow Answer

As the housing bubble began to collapse, the wave of initial foreclosures led to:

Correct AnswerverifiedShow Answer

As the housing market took off in the early 2000s:

Correct AnswerverifiedShow Answer

The practice of securitization of mortgages:

Correct AnswerverifiedShow Answer

In finance, leverage is using:

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Before it went bankrupt in 2008, Lehman Brothers investment bank had a leverage ratio of 30 which meant it was:

Correct AnswerverifiedShow Answer

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The Federal Reserve Bank can __ and the government can _ to stimulate aggregate demand in the economy.

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