The contagion effect refers to the fact thatA) deposit insurance has eliminated the problem of bank failures.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.

1. Depositors lack of information about the quality of bank assets can lead to A) bank panics. B) bank booms. C) sequencing. D) asset transformation. 2. The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures. 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. 3. A system of deposit insurance A) attracts risk-taking entrepreneurs into the banking industry. B) encourages bank managers to decrease risk. C) increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. D) increases the likelihood of bank runs. 4. Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions EXCEPT A) forgiving tax debt. B) lending from the central bank. C) lending directly from the government's treasury department. D) nationalizing and guaranteeing that all creditors will be repaid their loans in full. 5. In May 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois A) was a good investment opportunity for the government. B) could be the Chicago branch of a new governmentally-owned interstate banking system. C) was too big to fail. D) would become the center of the new midwest region central bank system. 6. The chartering process is especially designed to deal with the problem, and regular bank examinations help to reduce the problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard 7. Who has regulatory responsibility when a bank operates branches in many countries? A) It is not always clear. B) the WTO C) the U.S. Federal Reserve System D) the first country to submit an application 8. Moral hazard is an important concern of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) is a hindrance to efficient risk taking. C) causes the private cost of the insured activity to increase. D) creates an adverse selection problem but no moral hazard problem. 9. Which of the following is NOT a reason financial regulation and supervision is difficult in real life? A) Financial institutions have strong incentives to avoid existing regulations. B) Unintended consequences may happen if details in the regulations are not precise. C) Regulated firms lobby politicians to lean on regulators to ease the rules. D) Financial institutions are not required to follow the rules. 10. When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom.

What happens when a large bank becomes insolvent and closes?A.Depositors at the failed bank lose confidence and invest in the stock market, causing stock prices to rise.B.Depositors at other banks, fearing their banks may also fail, rush to withdraw their money, potentially triggering more bank failures due to insufficient reserves.C.The closure of one large bank has no effect on other banks, as each bank operates independently of one another.D.Other banks, learning from the failure, quickly adjust their policies to mitigate risks and prevent future bank failures.

If a large bank becomes insolvent and closes, it could cause furtherinstability in the banking system. Why? (more than one answer may be correct)This is a multi answer question. You can select one or more options as the answer.A.If depositors realise that another bank failed, they suspect their bankmay fail, triggering bank runs where depositors rush to their banks towithdraw as much as possibleB.Money supply reduces as a result of a households not withdrawing their deposits and holding their saving as currency.C.If banks do not hold sufficient reserves to meet the sudden increase inwithdrawal demands, they might become insolvent and eventually mustclose, which triggers even more bank runs

A system of deposit insuranceA) attracts risk-taking entrepreneurs into the banking industry.B) encourages bank managers to decrease risk.C) increases the incentives of depositors to monitor the riskiness of their bank's assetportfolio.D) increases the likelihood of bank runs.

If uncertainty about banks' health causes depositors to begin to withdraw their funds frombanks, the country experiences a(n)A) banking crisis.B) financial recovery.C) reduction of the adverse selection and moral hazard problems.D) increase in information available to investors.