Question

1. Under the requirements of the Basel Accords, a bank that holds a higher
share of its total assets as consumer loans relative to government securities will be required to
hold capital compared to a bank that holds a lower share of consumer loans to government
securities.
A. more
B. less
C. the same

2.) Which of the following is a reason why the sub-prime mortgage market
expanded significantly over the period 2001-2007?
A. High investor demand for safer assets created a high level of demand for sub-prime mortgages
that were used to create Collateralized Debt Obligations (CDOs).
B. Population demographics changed and there were fewer prime borrowers.
C. The recession of 2001 resulted in a general decline in credit-worthiness of the population.
D. The federal government increased oversight of traditional mortgage lenders.
E. None of these.

3. A financial entity was able to create Collateralized Debt Obligation (CDO)
and receive a higher credit rating on parts of it than a traditional mortgage-backed security
(MBS) created from the same mortgages because
A. mortgages used to create the CDO were fundamentally less risky than those used to create
the MBS.
B. models used to predict default of the mortgages included in the CDO were more sophisticated
than those used to predict default in the MBS.
C. mortgage payments were prioritized in the CDO such that senior tranches were paid first
in the event that some mortgages defaulted.
D. the standard deviation of returns of the tranches of the CDO were lower than the MBS.

4.) The unexpected events that lead to the banking crisis of 2007-2008 included
A. the slowing of housing price growth and the increase in demand for stocks that caused a
fall in the prices of CDOs.
B. the increase in the short-term interest rates due to Federal Reserve action and the gradual
decline of housing prices.
C. the rise in the price of oil and the decrease in value of technology stocks.
D. the dramatic fall in housing values and an increase in the default rate of home mortgages.

5. The Dodd Frank Act of 2010
A. requires that commercial banks of all size receive permission before distributing dividends
to shareholders.
B. prohibits investment banks and commercial banks from merging.
C. prohibits banks from branching across state lines.
D. requires that banks make loans in areas where they take deposits.
E. requires that large, systematically significant banks receive permission to distribute dividends
to shareholders.

6. When the Federal Reserve was created,
A. the U.S. economy had recently experienced wide-spread banking panic.
B. the U.S. economy operated under a gold standard.
C. all of these

7. Which of the following reduces the independence of the Federal Reserve?
A. Congress can amend the Federal Reserve act.
B. The Federal Reserve does not rely on the government for funds for operation.
C. The Federal Reserve can decide how to interpret its mandate.
D. The Federal Reserve can decide how to conduct monetary policy.

8.) The Federal Funds rate is
A. the interest rate the Federal Reserve charges banks on loans.
B. set by the FOMC every 8 weeks.
C. the interest rate banks charge each other on overnight loans.
D. the interest rate the Federal Reserve pays on reserves.
E. all of these.

D. bank failure was common.
E. the Federal Deposit Insurance Corporation (FDIC) did not exist

Answer 1

1.a) more

2c).The recession of 2001 resulted in a general decline in credit-worthiness of the population.

3.c)mortgage payments were prioritized in the CDO such that senior tranches were paid first
in the event that some mortgages defaulted.

4.D. the dramatic fall in housing values and an increase in the default rate of home mortgages.

5.E. requires that large, systematically significant banks receive permission to distribute dividends
to shareholders.

6.A. the U.S. economy had recently experienced wide-spread banking panic.

7.d.The Federal Reserve can decide how to conduct monetary policy.

8.E. all of these.