1. to prevent financial crisis, the central bank lowers the _______, which shoul
ID: 1222593 • Letter: 1
Question
1. to prevent financial crisis, the central bank lowers the _______, which should _______
A. target interest rate, raise aggregate expenditure B. inflation taget; increase the interest rate C. money supply; raise household confidence D. amount of money covered by deposit insurance; reduce moral hazard
2. The high ______ set by Central Bank of Argentina in the 1990s led to rapid ________ of the Argentine real rate and a _______ in net exports
A. tax rate; depreciation;rise
B. inflation target rate; appreciation;rise
C. money growth rate; depreciation;fall
D. nominal interest rate;appriciation ; fall
3. during the financial crisis, many borrowers defaulted on their loans and put many institutions at risk of failure. Policymakers could prevent failure by:
A. sellung their shares in the institution B. requiring the bank to reduce its reserve C. lending to the institution and purchasing its stock D. policymakers cannot prevent institutions from failing
4. Unnlike the financial crisis in the great depression in the 1920s and 1930s when the Fed ____, during the financial crisis of 2007-2009, the Fed ______
A. increased the money supply; reduced the money supply B. acted too late; acted too early C. reacted passively; reacted aggressively D. reacted agressively, reacted passively
5. To restrict risk taking by banks, regulators
A. Encourage banks to have deposite insurance B. enforce capial requirement C. guarante no interest loans to low-risk banks D. None of this answer is correct
Explanation / Answer
1. Part D. When deposit insurance is provided to banks that means that if ever the bank became insolvent, the government would pay the depositers the money back. In an economy where deposit insurance is provided it may happen that depositers do not monitor the activities of their bank and hence the problem of moral hazard exist wherein the bank might start making risky investments. In such a scenario, risky activities by the banks may lead to bank runs and hence a financial crisis. To prevent such a bank run, the cental bank can reduce the amount of deposit insurance to the banks and hence incentivise the depositers to monitor the activities of their banks to avoid a crisis.
2 Part A. The central bank of Argentina had imposed taxes on exports which lead to increase in the real exchange rate and hence led to depreciation. Depreciation leads to an increase in the net exports as goods become cheaper
3 part C. The policy makers can provide cash to the bank, help them become solvent and lend to the bank. This will the banks become functional again
4 Part C. The Fed durong the Great Depression of 1930s neither lent significantly to distressed banks nor increased the monetary base sufficiently to arrest declines in the money stock and price level. However after 2008 it took aggressive measures such as Quantiative easing
5. Part B. the regulators can impose capital requirements on the banks wherein the Basel norms impose limits on the capital and how the banks should handle capital in relation to assets
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