1. What is the primary reason why governments and central banks act as lenders of last resort for the banking system?
- This type of lending provides short-term cash for banks that are facing a bank run but are fundamentally solvent.
- By doing so, governments can guarantee the liabilities of the banking system and avoid bank runs.
- This type of lending provides credit to shadow banks to prevent credit markets from freezing up in times of crisis.
- By doing so, government and central banks can ensure that banks have enough capital to remain solvent during times of crisis.
2. During periods of financial crisis, monetary policy is typically:
- less effective, since businesses and consumers are less likely to borrow even as interest rates fall.
- less effective, since aggressive monetary policy will likely lead to rapid inflation during a financial crisis.
- more effective, since financial crises primarily affect the economy through declining investment, and aggressive monetary policy will boost investment.
- more effective, since financial crises primarily affect the economy through declining consumption, and aggressive monetary policy will boost consumption.
3. Worldwide, financial crises are:
- common events, and begin for a variety of reasons.
- rare events, and begin for a variety of reasons.
- rare events, but typically have similar causes.
- common events, and typically have similar causes.
4. During the financial crisis of 2008, which of the following was NOT an issue for the U.S. economy?
- debt overhang, as asset prices plummeted
- a credit crunch affecting borrowing and spending
- a spike in interest rates as a result of monetary policy
- soaring unemployment, as firms tried to cut costs
5. Financial crises are more likely to occur in:
- smaller, poor economies because the financial sector makes up a larger segment of their economy.
- advanced economies because banks can grow to a large size and affect the entire economy.
- advanced economies because they are more sensitive to global events.
- smaller, poor economies because they often lack the regulation to prevent financial panics.