Question 1

In finance, the leverage ratio refers to:

Accepted Answer

A)   how a firm decides to borrow funds that it doesn't have.
B)   using borrowed money to pay for investments.
C)   ratio of assets it has relative to its equity.
D)   ratio of assets it has relative to debt.E) B) and C)
F) A) and D)

Question 2

Quantitative easing involves policies that are designed to:

Accepted Answer

A)   directly increase the money supply by a certain amount.
B)   indirectly increase the money supply by decreasing interest rates.
C)   directly increase aggregate demand through increased government spending.
D)   indirectly increase aggregate demand through decreased taxes.E) A) and B)
F) C) and D)

Question 3

When investors follow a "herd instinct," they:

Accepted Answer

A)   invest in something as a group, making it appear more valuable than it is.
B)   make decisions as a group, inflating the prices of goods somewhat arbitrarily.
C)   invest in something simply because everyone else is doing it.
D)   only makes decisions as a group, making it hard to determine individual behavior.E) A) and B)
F) B) and D)

Question 4

A mortgage loan made to a borrower with a low credit score is called a:

Accepted Answer

A)   prime mortgage.
B)   hi-risk mortgage loan.
C)   bundled financial loan.
D)   subprime mortgage.E) A) and D)
F) A) and C)

Question 5

Debt service is the percent of:

Accepted Answer

A)   GDP that is owed in debt.
B)   disposable income consumers have to pay for their debts.
C)   the total value of household debt that banks pay to create the loans.
D)   the total value of household debt that consumers pay in interest.E) C) and D)
F) B) and D)

Question 6

After two rounds of quantitative easing, the money supply was:

Accepted Answer

A)   $3 trillion, more than triple the amount pre-crisis.
B)   $2 trillion, nearly double the amount pre-crisis.
C)   $1 trillion, nearly the same as the amount pre-crisis.
D)   $2 trillion, still less than the amount pre-crisis.E) All of the above
F) B) and D)

Question 7

Banks lost trillions of dollars when the housing bubble collapsed because:

Accepted Answer

A)   many borrowers defaulted on their mortgages.
B)   many large banks held massive quantities of mortgage-backed securities.
C)   most of their customers had to close their accounts due to foreclosures.
D)   Both A and B are correct.E) None of the above
F) A) and B)

Question 8

Which of the following is a reason why aggregate supply decreased following the housing bubble collapse?

Accepted Answer

A)   Businesses could not access credit to carry out their daily operations.
B)   Consumption decreased.
C)   People stopped investing in homes.
D)   Government tax rates were altered as a response to change in aggregate output.E) A) and B)
F) A) and C)

Question 9

From 1929 to 1932, the total value of the stock market:

Accepted Answer

A)   stayed the same.
B)   more than tripled.
C)   more than quadrupled.
D)   decreased by nearly 90 percent.E) C) and D)
F) B) and D)

Question 10

One reason consumers were able to assume an increasing amount of household debt during the 2000s is because:

Accepted Answer

A)   interest rates were so low that it made borrowing easier.
B)   even though interest rates were high, the inflated values of homes allowed them to afford it.
C)   interest rates were so low that people found it very easy to save their extra income.
D)   even though interest rates were high, the herd instinct gave people a false confidence in their future wealth.E) C) and D)
F) None of the above

Question 11

A financial bubble starts to inflate when:

Accepted Answer

A)   investors become irrationally optimistic that an asset's price will continue to rise.
B)   investors become irrationally pessimistic that an asset needs to be sold immediately.
C)   a good experiences an unexplained rise in demand increasing its price.
D)   inflation begins to accelerate, and monetary and fiscal policy are ineffective at slowing its growth.E) A) and D)
F) B) and C)

Question 12

When investors use borrowed funds to pay for investments, it's called:

Accepted Answer

A)   leveraging.
B)   tulip mania.
C)   hedging.
D)   herding.E) A) and B)
F) All of the above

Question 13

If the idea of herd instinct is true, it suggests that the:

Accepted Answer

A)   efficient-market hypothesis doesn't always hold.
B)   efficient-market hypothesis does, in fact, hold.
C)   inefficient-market hypothesis doesn't always hold.
D)   inefficient-market hypothesis does, in fact, hold.E) None of the above
F) A) and B)

Question 14

The two interconnected concepts that lie at the heart of many financial crises are:

Accepted Answer

A)   rational expectations and leverage.
B)   irrational expectations and forecasting.
C)   forecasting and leverage.
D)   irrational expectations and leverage.E) B) and D)
F) A) and B)

Question 15

When investors invest in something simply because everyone else is doing it, they are:

Accepted Answer

A)   suspect to "tulip mania."
B)   following a "herd instinct."
C)   acting objectively on full information available in the market.
D)   leveraging market performance for their own gain.E) B) and D)
F) None of the above

Question 16

Foreclosure is when a:

Accepted Answer

A)   bank takes ownership of a property because the property owner cannot make the mortgage payments due.
B)   person is forced to sell his home for less than what he paid for it.
C)   person is forced to sell his home for less than what it is currently worth.
D)   person is forced to sell his home for less than what he still owes for it.E) A) and B)
F) A) and C)

Question 17

Banks considered "too big to fail" were:

Accepted Answer

A)   bailed out through fiscal policy.
B)   bailed out through consumer spending.
C)   allowed to go bankrupt.
D)   helped by fiscal policy, but eventually went bankrupt.E) All of the above
F) C) and D)

Question 18

If you lost 10 percent on $200 worth of stock in a 3x margin account, then you would lose:

Accepted Answer

A)   $60.
B)   $20.
C)   $30.
D)   $40.E) A) and B)
F) A) and C)

Question 19

Economists feared that any attempt to _________________ without first ___________________ would have been ineffective at best and dangerous at worst.

Accepted Answer

A)   stimulate aggregate demand; addressing the lack of supply
B)   address the lack of supply; stimulating aggregate demand
C)   curtail inflation; lowering interest rates
D)   lower interest rates; curtailing inflationE) A) and B)
F) B) and D)

Question 20

The shifts in aggregate demand and aggregate supply as a result of the housing bubble collapse caused output to:

Accepted Answer

A)   fall dramatically immediately.
B)   stay the same, since the shifts worked in opposite directions.
C)   rise temporarily, then fall.
D)   fall at a relatively slow rate over time.E) B) and C)
F) A) and D)

Exam 17: Financial Crisis

Banks considered "too big to fail" were:

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When investors invest in something simply because everyone else is doing it, they are:

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Economists feared that any attempt to _________________ without first ___________________ would have been ineffective at best and dangerous at worst.

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The two interconnected concepts that lie at the heart of many financial crises are:

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Debt service is the percent of:

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After two rounds of quantitative easing, the money supply was:

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A financial bubble starts to inflate when:

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A mortgage loan made to a borrower with a low credit score is called a:

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In finance, the leverage ratio refers to:

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Quantitative easing involves policies that are designed to:

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Foreclosure is when a:

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From 1929 to 1932, the total value of the stock market:

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If you lost 10 percent on $200 worth of stock in a 3x margin account, then you would lose:

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Banks lost trillions of dollars when the housing bubble collapsed because:

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The shifts in aggregate demand and aggregate supply as a result of the housing bubble collapse caused output to:

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Which of the following is a reason why aggregate supply decreased following the housing bubble collapse?

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If the idea of herd instinct is true, it suggests that the:

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When investors use borrowed funds to pay for investments, it's called:

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When investors follow a "herd instinct," they:

Correct AnswerverifiedShow Answer

One reason consumers were able to assume an increasing amount of household debt during the 2000s is because:

Correct AnswerverifiedShow Answer

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Economists feared that any attempt to _ without first ___ would have been ineffective at best and dangerous at worst.

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