Q&A Hero

Q: In constructing CDOs, the mortgage loans are sliced into tranches with the cash flowing first to the _____. a) most senior tranche b) mezzanine tranche c) equity tranche d) non-investment grade tranche

Q: Bella, a depositor with Curio Bank, wishes to withdraw her funds. The bank ________. a) is not obliged to pay Bella b) must convince Bella to take out a loan in order to reap monthly savings c) is required to pay Bella only a fraction of the amount originally deposited by her in order to keep the reserve requirement intact d) must replace the funds with other deposits or reduce its loans after paying Bella

Q: The Dodd-Frank Act made suing an agency for fraud difficult by inhibiting investors to bring lawsuits against credit rating agencies.

Q: No tax credit was given under the Making Work Pay program.

Q: The Obama administrations $787 billion economic stimulus program gave tax credits to first-time homebuyers, new car buyers who turned in a clunker, and homeowners who made their homes more energy efficient.

Q: The Troubled Asset Relief Program (TARP) is administered by the Department of the Treasury.

Q: Following the fall of Lehman Brothers in September 2008, the repo market froze leading to a severe recession.

Q: The dissenting members of the Financial Crisis Inquiry Commission identified the housing bubble as one of the essential causes of the crisis.

Q: The majority of members of the Financial Crisis Inquiry Commission concluded that over-the-counter derivatives contributed significantly to the financial crisis.

Q: The majority of members of the Financial Crisis Inquiry Commission concluded that the financial crisis was unavoidable.

Q: Independent mortgage brokers cannot be the originators of mortgage loans.

Q: When credit card issuers cancel the cards of high-risk cardholders, more people have access to credit.

Q: Congress passed the Credit CARD Act of 2009 to decrease the regulation of credit card issuers.

Q: The Securities Exchange Act did not regulate insider trading.

Q: The Securities Act required full disclosure when new securities were issued.

Q: The Securities Exchange Act made full disclosure unnecessary as a measure to protect the privacy of the transacting parties.

Q: The Securities Exchange Act established the Securities and Exchange Commission (SEC) to regulate and police the markets and those who trade in them.

Q: The Federal Reserve has rule-making authority over the practices of credit card companies.

Q: The Senate's confirmation is not required for the appointment of the members of the board of governors of the Federal Reserve.

Q: The Federal Reserve Bank of New York serves as overseer of banks and managed the bailout of banks during the financial crisis.

Q: The Federal Reserve is governed by a seven-member board of governors.

Q: When a bank buys mortgage loans and issues new securities, it engineers the new securities so as to ensure that it alone benefits from the financial gain.

Q: Credit card borrowings and mortgage loans are the largest securitization categories.

Q: Securitization involves pooling contractual debt obligations and issuing new securities backed by those obligations.

Q: If a depositor wants to withdraw her funds, the bank is not obliged to replace the funds with other deposits.

Q: Depository institutions such as banks are required to maintain a fractional reserve requirement, which allows the formal banking system to lend a multiple of the deposits held.

Q: Savings and investments do not involve risks.

Q: Financial Markets and Their Regulation True/False Questions:

Q: Federal law delegates the implementation of federal regulations such as environmental issues or health issues to the states.

Q: The Fifth and Fourteenth Amendments provide the authority for regulation.

Q: Regulation takes place through a private process that is relatively closed and low-profile.

Q: When there are market imperfections, government intervention could improve its efficiency.

Q: Regulation: Law, Economics, and Politics

Q: Discuss the roles of regulation.

Q: Discuss the political economy theory of regulation.

Q: Write a short note on the different means to deal with market imperfections in the case of moral hazards.

Q: What are the two theories to explain where regulation is and is not imposed?

Q: Courts could review regulatory actions for whether they are arbitrary or capricious. Explain briefly.

Q: ______ occurs when one group of customers pays more and another group pays less than the cost of providing their service. a) Deadweight loss b) Free-riding c) Moral hazard d) Cross-subsidization

Q: A leading airline firm increases the airfare for its business and first class passengers on high-density routes. This aids in reducing the prices for economy class passengers on low-density routes. This is an example of ________. a) cross-subsidization b) moral hazard c) redistribution of wealth d) deadweight loss

Q: GlObe-dOt is a leading manufacturer of information display systems based in California. It seeks uniform federal regulation to impose a carbon emission tax on all manufacturing firms. This is an example of ________. a) natural monopoly b) rent-seeking theory c) capture theory d) moral hazard

Q: Regulation in the mobile phone industry was sought in part to serve the interests of incumbent firms and increase the profit margin by regulating prices and entry of new firms. This is an example of ________. a) deadweight loss b) moral hazard c) capture theory d) rent-seeking theory

Q: ________ predicts that regulation initially will be found where there are market imperfections and over time will evolve to serve the interests of the regulated industry. a) Adverse selection b) Asymmetric information c) Capture theory d) Rent-seeking theory

Q: ________ are only a necessary condition for regulation to improve economic efficiency. a) Market imperfections b) Nonmarket issues c) Corporate campaigns d) Grassroots campaigns

Q: ________ refers to inefficient actions induced by policy instruments that cause people not to bear the full consequences of their actions. a) Adverse selection b) Moral hazard c) Externalities d) Natural monopoly

Q: ________ is a market imperfection that results when sellers have incomplete information about customers. a) Adverse selection b) Pecuniary externality c) Nonpecuniary externality d) Deadweight loss

Q: Which of the following goods is provided by the government to redistribute income rather than because they are public goods? a) landsat satellite system b) public housing c) radio and television broadcasts d) national defense

Q: Which of the following situations reflects a nonpecuniary externality? a) A chain of retail stores opens in an area which increases the demand and price of labor. b) The sudden steep rise in oil prices lead to the enactment of a complex regulatory system which instead stimulates the demand for oil. c) Toxic waste from a chemical manufacturing firm pollutes the water supply for a meat packaging industry in the area. d) Toxic waste from a chemical manufacturing firm pollutes the water supply in the area which leads to a steep fall in real estate prices in the area.

Q: ________ is present when the actions of one economic agent affect other economic agents through changes in the prices of goods and services. a) Natural monopoly b) Asymmetric information c) Pecuniary externalities d) Nonpecuniary externalities

Q: In natural monopoly, ________ is the economic inefficiency caused by the restriction of output which raises product prices above its marginal costs. a) moral hazard b) deadweight loss c) externalities d) consumer surplus

Q: A(n) ________ results when costs are decreasing in the scale of output or in the scope of the set of goods a firm produces. a) moral hazard b) asymmetric information c) pecuniary externality d) natural monopoly

Q: The Congress exerts great influence on the regulatory agencies by ________. a) using its budgetary and oversight authorities b) appointing the regulatory agencies administrators c) using the Office of Management and Budget (OMB) d) delegating policymaking to agencies

Q: Which of the following statements is true of the nonmarket environment of regulatory agencies? a) Commissioners and administrators of regulatory agencies do not require Senate confirmation. b) Private interests affect regulatory agencies indirectly through pressure on Congress and the executive branch. c) Congress can indirectly revise and block changes in statues. d) The president cannot review regulations to influence regulatory agencies.

Q: Which of the following approaches can aid in influencing regulatory agency decisions? a) boycott b) bribery c) organizational learning d) lobbying

Q: Regulatory decisions are required to bear a relationship to a proper public purpose under the Constitution. This is review under the framework of ________. a) procedural due process b) substantive due process c) arbitrary regulatory actions d) capricious regulatory actions

Q: Congress enacted the ________ to provide for public notice and comment prior to agency action. a) National Industrial Recovery Act b) Sherman Antitrust Act c) Administrative Procedures Act of 1946 d) Interstate Commerce Act of 1887

Q: Which of the following regulatory agencies is not located in a cabinet department? a) Environmental Protection Agency b) Federal Aviation Administration c) Occupational Health and Safety Administration d) Food and Drug Administration

Q: ________ Amendment places a limit on the application of regulation. a) First b) Fourteenth c) Eighth d) Nineteenth

Q: The major focus of the third phase of regulation in the 1960s was ________. a) labor and economic regulation b) economic deregulation c) political regulation d) social regulation

Q: The fourth period of major regulatory change which started in the 1970s focused on the ________. a) introduction of social regulation b) introduction of economic deregulation to several industries c) extension of regulation to labor markets and industries d) regulatory bodies at the state level and extension to federal level

Q: The progressive era of major regulatory change focused on the ________. a) introduction of social regulation b) introduction of economic deregulation to several industries c) extension of regulation to labor markets and industries d) regulatory bodies at the state level and extension to federal level

Q: Which of the following institutions does not implement regulation? a) judicial institutions b) National Labor Relations Board c) independent commission d) agencies of the executive branch

Q: Which of the following statements is true of regulation? a) It is implemented through judicial institutions. b) It is based on legislatively enacted statutes. c) It is not implemented by independent commissions. d) It takes place through a private process.

Q: The political economy theory views regulation as shaped by market imperfections, institutions and their officeholders, and the nonmarket action of private interests.

Q: Regulation is rarely used for public purposes or to accomplish fairness goals as it requires long term policies.

Q: Regulation is also supplied in response to the demands of interest groups other than business.

Q: From the perspective of Chicago school economists, regulation initially will be found where there are market imperfections and over time will evolve to serve the interests of the regulated industry.

Q: Firms seek federal regulations to avoid states imposing uniform regulations.

Q: Regulation is not always intended to correct market imperfections but instead can be the result of political forces that serve objectives other than economic efficiency.

Q: Government intervention to deal with market imperfections or failure may itself be subject to a nonmarket failure.

Q: A pharmaceutical company does not mention all the side-effects of its new medical formulation. This is an example of moral hazard problem.

Q: Although regulation is one response to moral hazard problems, but regulation can also cause moral hazard problems.

Q: Asymmetric information results in market efficiency when it is in the self-interest of its possessor not to supply it.

Q: Even when there are advantageous trades that could be made, market imperfections can arise when people have different information at the time they act.

Q: Private sector is does not supply public goods.

Q: Natural monopolies provide an efficiency rationale for regulation to align private and social costs.

Q: A natural monopoly occurs if having more than one supplier would result in an uneconomical duplication of facilities.

Q: Substantial economic inefficiency is an inherent consequence of a natural monopoly.

Q: A natural monopoly results when costs are increasing in the scale of output or in the scope of the set of goods a firm produces.

Q: The market imperfection perspective is grounded in political economy theory.