var imagesLarge = "kwmodsmacro3eupdates-numbered_fig-ch17_fig_1,kwmodsmacro3eupdates-numbered_fig-ch17_fig_2,kwmodsmacro3eupdates-numbered_fig-ch17_fig_4,kwmodsmacro3eupdates-numbered_fig-ch17_fig_7,kwmodsmacro3eupdates-numbered_fig-ch17_fig_8,,"; var imagesXlarge = "kwmodsmacro3eupdates-unnumbered_fig-ch17_un_01,kwmodsmacro3eupdates-numbered_fig-ch17_fig_3,,,"; /*** CYU answers ***/ xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-1-1a'] = "
This is not an example of maturity transformation because no short-term liabilities are being turned into long-term assets. So it is not subject to a bank run.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-1-1b'] = "This is an example of maturity transformation: Dana incurs a short-term liability, credit card debt, to fund the acquisition of a long-term asset, better job skills. It can result in a bank-run-like phenomenon if her credit card lender becomes fearful of her ability to repay and stops lending to her. If this happens, she will not be able to finish her course and, as a result, will not be able to get the better job that would allow her to pay off her credit card loans.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-1-1c'] = "This is not an example of maturity transformation because there are no short-term liabilities. The partnership itself has no obligation to repay an individual partner’s investment and so has no liabilities, short term or long term.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-1-1d'] = "This is an example of maturity transformation: the checking accounts are short-term liabilities of the student union savings bank, and the student loans are long-term assets.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-2-1a'] = "The asset bubble occurred in Irish real estate.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-2-1b'] = "The channel of the financial contagion was the short-term lending that Irish banks depended on from the wholesale interbank lending market. When lenders began to worry about the soundness of the Irish banks, they refused to lend any more money, leading to a type of bank run and putting the Irish banks at great risk of failure.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-2-2a'] = "Because the bank run started with fears among lenders to Irish banks, the Irish government sought to eliminate those fears by guaranteeing the lenders that they would be repaid in full. It was a questionable strategy, though, because it put the Irish taxpayers on the hook for potentially very large losses, so large that they threatened the solvency of the Irish government.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-3-1a'] = "The Federal Reserve was able to prevent a replay of the Great Depression because, unlike in the 1930s, it acted as a lender of last resort to stabilize the banking sector and halt the contagion. But it was unable to significantly reduce the surge in unemployment because the United States experienced a credit crunch and a vicious circle of deleveraging, leaving monetary policy relatively ineffective.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-3-2a'] = "In the aftermath of a severe banking crisis, businesses and households have high debt and reduced assets. They cut back on spending to try to reduce their debt. So they are unwilling to borrow regardless of how low the interest rate is.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-4-1a'] = "According to standard macroeconomics, a government should adopt expansionary policies to increase aggregate demand to address an economic slump. France, however, did just the opposite, responding to a weaker economy with a contractionary fiscal policy that would make the economy even weaker. This shows that the French government had adopted the austerity view, believing that it was more important to try to assure markets of its solvency than to support the economy.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-5-1a'] = "Because shadow banks like Lehman relied on short-term borrowing to fund their operations, fears about their soundness could quickly lead lenders to immediately cut off their credit and force them into failure. And without membership in the lender-of-last-resort system, shadow banks like Lehman could not borrow from the Federal Reserve to make up for the short-term loans it had lost.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-5-2a'] = "If there had been only a formal depository banking sector, several factors would have mitigated the potential and scope of a banking crisis. First, there would have been no repo financing; the only short-term liabilities would have been customers’ deposits, and these would have been largely covered by deposit insurance. Second, capital requirements would have reduced banks’ willingness to take on excessive risk, such as holding onto subprime mortgages. Also, direct oversight by the Federal Reserve would have prevented so much concentration of risk within the banking sector. Finally, depository banks are within the lender-of-last-resort system; as a result, depository banks had another layer of protection against the fear of depositors and other creditors that they couldn’t meet their obligations. All of these factors would have reduced the potential and scope of a banking crisis.
"; xBookUtils.showAnswers['kwmodsmacro3eupdates-cyu-17-5-3a'] = "Because the shadow banking sector had become such a critical part of the U.S. economy, the crisis of 2008 made it clear that in the event of another crisis the government would find it necessary to guarantee a wide range of financial institution debts, including those of shadow banks as well as depository banks. This created an incentive problem because it would induce shadow banks to take more risk, knowing that the government would bail them out in the event of a meltdown. To counteract this, the Dodd-Frank bill gave the government the power to regulate “systemically important” shadow banks (those likely to require bailing out) in order to reduce their risk taking. It also gave the government the power to seize control of failing shadow banks in a way that was fair to taxpayers and didn’t unfairly enrich the owners of the banks.
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