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Exam 18: The Financial Crisis of 2007-2009

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Question 1

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Describe the differences between traditional and nontraditional lending practices.Under which category do subprime loans belong?

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In traditional lending,borrowers must pr...

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For financial institutions,securitization is the means by which regulatory capital arbitrage lowers capital requirements.

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Describe how,according to some economists,the Fed's actions and the"global savings glut" both contributed to rising U.S.housing prices in the early 2000s.

Suppose that a bank has $500 million in asset X,$400 million in asset Y,and $200 million in asset Z.Each asset has a different risk weight.The risk weight for asset X is 40%,the risk weight for asset Y is 70%,and asset Z has zero risk.The amount of risk-weighted assets for this bank is ____________ million.Assuming that the bank has to hold capital equal to 8% of its risk-weighted assets,the bank must hold _____________ million in capital.

In February 2009,Congress passed (and President Obama signed)a $787 billion fiscal stimulus bill in an attempt to improve the economy.

Securitization is the process by which financial institutions

Which sequence of events correctly and sequentially best describes financial sector problems spilling over to the real sector of the economy?

According to economist John Taylor,the Fed set its federal funds rate target too high during the period 2002-early 2006,which contributed to the financial crisis of 2007-2009.

If nominal GDP is declining,it is necessarily true that Real GDP is also declining.

According to John Taylor (for whom the Taylor rule is named) ,during the period 2002-early 2006 actual Fed policy was "too_________" ,which he believes led to both interest rates being "too ________" and rising housing prices in the United States.

__________________ capital specifies the amount of capital financial institutions should hold based on the riskiness of their assets.

If the value of a bank's assets is rising,a high leverage ratio increases the percentage rise in its capital.

In the early 2000s,Fannie Mae and Freddie Mac came under political pressure to buy nontraditional loans.

According to Alan Greenspan,the type of inflation that the Taylor Rule is best at addressing is

A bank has $390 million in assets and $330 million in liabilities.The bank's net worth is _____________ million and its leverage ratio is __________________.

In the early 2000s,banks lowered lending standards to comply with the Community Reinvestment Act.

Describe three of the ways that the U.S.federal government responded to the financial crisis of 2007-2009 and to the resulting problems in the real sector of the economy.Be sure to include in your answer the government's specific intent in each of these actions.

A ____________________ loan is a nontraditional mortgage loan granted to persons who have some factor,such as low credit ratings,which suggest that they could default on the repayment of their debt.

Which of the following is more nearly consistent with a global savings glut?

There are some economists who argue that low mortgage interest rates in the time period preceeding the financial crisis of 2007-2009 were a result of a ___________ in global savings.They argue that emerging countries began to save ___________ which helped to _____________ the supply of loanable funds in the United States.