Question 1

The stock that created a bubble in the late 1600s belonged to:

Accepted Answer

A)   the South Seas Company.
B)   the East India Company.
C)   His Majesty's Company.
D)   the Mediterranean Company.E) None of the above
F) A) and B)

Question 2

The percent of disposable income that consumers have to pay for their debt is called:

Accepted Answer

A)   a debtor's mark.
B)   debt service.
C)   the cost of debt.
D)   debt accountability.E) All of the above
F) A) and B)

Question 3

On the whole, when financial markets are _______, leverage _______; when markets are _______, leverage _______.

Accepted Answer

A)   expanding; multiplies the gains; crashing; magnifies the losses
B)   expanding; magnifies the losses; crashing; multiplies the gains
C)   crashing; diminishes the losses; expanding; diminishes the gains
D)   crashing; magnifies the losses; expanding; diminishes the gainsE) All of the above
F) A) and B)

Question 4

Which interconnected concepts lie at the heart of many financial crises? I. Rational expectations
II)  Irrational expectations
III)  Forecasting
IV)  Leverage

Accepted Answer

A)   I and IV
B)   II and III
C)   III and IV
D)   II and IVE) B) and C)
F) C) and D)

Question 5

Banks became more willing to make subprime loans because of:

Accepted Answer

A)   securitization.
B)   leveraging.
C)   hedging.
D)   herd behaviour.E) A) and C)
F) B) and C)

Question 6

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) A) and D)
F) C) and D)

Question 7

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) B) and C)
F) A) and B)

Question 8

The tools that were intended to allocate funds and spread risk more efficiently in the housing market made it:

Accepted Answer

A)   easier to keep everyone fully informed.
B)   more difficult to keep everyone fully informed.
C)   easier to understand the true risk involved with these assets.
D)   more difficult to justify buying mortgage-backed securities over other low-risk assets.E) All of the above
F) None of the above

Question 9

The recency effect is:

Accepted Answer

A)   the basic human tendency to overvalue recent experience when trying to predict the future.
B)   shorting financial investments that are subject to a bubble.
C)   earning a profit by betting against what everyone else is doing.
D)   accounting for the most recent profits or losses first on financial statements.E) None of the above
F) A) and B)

Question 10

During the housing bubble, homeowners:

Accepted Answer

A)   had limited access to credit.
B)   were only offered conservative, low-risk mortgages.
C)   had high debt service on their mortgages.
D)   had a high leverage on their homes.E) B) and D)
F) B) and C)

Question 11

When an economy is at a zero lower bound, a central bank looking to stimulate the economy can:

Accepted Answer

A)   do nothing; liquidity traps prevent further policy action.
B)   use quantitative easing.
C)   lower the reserve requirement.
D)   keep the discount window open longer.E) None of the above
F) A) and C)

Question 12

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

Accepted Answer

A)   less government regulation of financial markets.
B)   an increase in stock prices, as investors looked for safer investments.
C)   an increase in interest rates.
D)   a market flooded with homes for sale, further depressing their prices.E) All of the above
F) None of the above

Question 13

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)   work less and save less.
D)   save more through savings accounts and bonds.E) B) and D)
F) None of the above

Question 14

The practice of using borrowed funds to pay for investments is:

Accepted Answer

A)   leverage.
B)   recency.
C)   hedging.
D)   herding.E) A) and B)
F) All of the above

Question 15

The combined efforts of the Fed and the Treasury in response to the financial crisis following the housing market crash caused:

Accepted Answer

A)   the aggregate supply curve to shift to the right, back to its pre-crisis level.
B)   the aggregate supply curve to shift to the left, far below its pre-crisis level.
C)   the aggregate demand curve to shift to the right, back to its pre-crisis level.
D)   the aggregate supply curve to shift to the left, back to its pre-crisis level.E) B) and C)
F) A) and B)

Question 16

The level of household debt incurred over the two decades leading up to the 2008 crisis was only sustainable if:

Accepted Answer

A)   interest rates remained low and housing prices remained high.
B)   interest rates and housing prices both remained high.
C)   interest rates and housing prices both remained low.
D)   interest rates remained high and housing prices remained low.E) A) and B)
F) B) and D)

Question 17

The basic human tendency to overvalue recent experience when trying to predict the future is called the _______ effect.

Accepted Answer

A)   anchoring
B)   leverage
C)   optimism
D)   recencyE) A) and B)
F) A) and C)

Question 18

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

Accepted Answer

A)   following their "rational intuition."
B)   following a "herd instinct."
C)   supporting the efficient market hypothesis.
D)   conducting performance analysis.E) None of the above
F) A) and B)

Question 19

The Great Depression was characterized by:

Accepted Answer

A)   unemployment above 25 percent.
B)   the Roaring Twenties.
C)   accelerated economic growth.
D)   firms rapidly expanding their borrowing rates.E) A) and B)
F) A) and C)

Question 20

What contributed to the financial crash in 1929?

Accepted Answer

A)   Widespread purchasing of stocks on margin
B)   International unrest
C)   A decline in the productivity of U.S. manufacturing
D)   Government regulation.E) B) and C)
F) A) and B)

Exam 17: Financialcrisis

Banks became more willing to make subprime loans because of:

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The basic human tendency to overvalue recent experience when trying to predict the future is called the _______ effect.

Correct AnswerverifiedShow Answer

The stock that created a bubble in the late 1600s belonged to:

Correct AnswerverifiedShow Answer

The practice of using borrowed funds to pay for investments is:

Correct AnswerverifiedShow Answer

Which interconnected concepts lie at the heart of many financial crises? I. Rational expectations II) Irrational expectations III) Forecasting IV) Leverage

Correct AnswerverifiedShow Answer

Quantitative easing involves policies that are designed to:

Correct AnswerverifiedShow Answer

The percent of disposable income that consumers have to pay for their debt is called:

Correct AnswerverifiedShow Answer

During the housing bubble, homeowners:

Correct AnswerverifiedShow Answer

On the whole, when financial markets are _______, leverage _______; when markets are _______, leverage _______.

Correct AnswerverifiedShow Answer

The combined efforts of the Fed and the Treasury in response to the financial crisis following the housing market crash caused:

Correct AnswerverifiedShow Answer

What contributed to the financial crash in 1929?

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The Great Depression was characterized by:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The tools that were intended to allocate funds and spread risk more efficiently in the housing market made it:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The recency effect is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When an economy is at a zero lower bound, a central bank looking to stimulate the economy can:

Correct AnswerverifiedShow Answer

The level of household debt incurred over the two decades leading up to the 2008 crisis was only sustainable if:

Correct AnswerverifiedShow Answer

Leading to the collapse of the housing bubble, inflated home values caused consumers to:

Correct AnswerverifiedShow Answer

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On the whole, when financial markets are ___, leverage _; when markets are _, leverage ___.

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