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Unformatted text preview: Chapter 11 Economic Analysis of Banking Regulation T Multiple Choice 1) Although the FDIC was created to prevent bank failures, its existence encourages banks to (a) take too much risk. (b) hold too much capital. (c) open too many branches. (d) buy too much stock. Answer: A Question Status: Previous Edition 2) During the boom years of the 1920s, bank failures were quite (a) uncommon, averaging less than 30 per year. (b) uncommon, averaging less than 100 per year. (c) common, averaging about 600 per year. (d) common, averaging about 1000 per year. Answer: C Question Status: Previous Edition 3) The fact that banks operate on a “sequential service constraint” means that (a) all depositors share equally in the bank’s funds during a crisis. (b) depositors arriving last are just as likely to receive their funds as those arriving first. (c) depositors arriving first have the best chance of withdrawing their funds. (d) no depositor can withdraw funds during a crisis. (e) banks randomly select the depositors who will receive all of their funds. Answer: C Question Status: New 4) Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a (a) last-in, first-out constraint. (b) sequential service constraint. (c) double-coincidence of wants constraint. (d) everyone-shares-equally constraint. (e) first-come, last-served constraint. Answer: B Question Status: New 388 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 5) The fact that depositors cannot distinguish good from bad banks is a(n) (a) adverse selection problem. (b) moral hazard problem. (c) asymmetric information problem. (d) too-big-to-fail problem. (e) none of the above. Answer: C Question Status: New 6) Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the (a) too-big-to-fail effect. (b) moral hazard problem. (c) adverse selection problem. (d) contagion effect. (e) sequential service constraint. Answer: D Question Status: New 7) The contagion effect refers to the fact that (a) some banks are too big to fail. (b) bank runs involve only sound banks. (c) bank runs involve only insolvent banks. (d) the failure of one bank can hasten the failure of other banks. (e) deposit insurance has eliminated the problem of bank failures. Answer: D Question Status: New 8) A system of deposit insurance (a) attracts risk-taking entrepreneurs into the banking industry. (b) encourages bank managers to assume increased risk. (c) increases the incentives of depositors to monitor the riskiness of their bank’s asset portfolio. (d) does all of the above. (e) does only (a) and (b) of the above....
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This note was uploaded on 10/17/2011 for the course ECON 317 taught by Professor Guidry during the Spring '11 term at Nicholls State.
- Spring '11