Question

1. Two institutions that were developed to provide banking stability in the United States after the great depression are

		FDIC insurance and efficient market hypothesis
		derivatives markets and the efficient market hypothesis
		FDIC insurance and a lender of last resort
		open capital markets and a nationalized banking industry

2. The international community lacks a reliable lender of last resort

True

False

3. While capital outflow might arise from desire to avoid falling domestic asset values, speculative attack is motivated by

		profiting from expected depreciation of the currency
		profiting from rising domestic asset values
		private sector attempts to stabilize the economy when government institutions fail
		racism against emerging markets

4. What is the difference between a solvency crises and a liquidity crises

		there is no difference
		solvency refers to an inability to meet withdraw requests, liquidity refers to assets not matching liabilities
		solvency crises occur in equity markets, liquidity crises occur in debt markets
		liquidity crises refers to an inability to meet withdraw requests, solvency crises refers to assets not matching liabilities

Answer 1

1. C. FDIC insurance and a lender of last resort.

If liquidity problems arose at the new bridge institution, the FDIC could guarantee the institution's short-term liabilities, or it could act as a lender of last resort using funds provided by the Treasury and ultimately repaid by the institution and, if necessary, the banking industry through assessments.

2. A. true

3. A. profiting from expected depreciation of the currency.

4. D. liquidity crises refers to an inability to meet withdraw requests, solvency crises refers to assets not matching liabilities.

A liquidity issue (crisis) occurs when a firm has a temporary cash flow problem. Its assets are greater than its debts, but some assets are illiquid.  A solvency crisis occurs when a firm has debts that it can't meet through its assets.