Which of the Following Is an Explanation of Banking Crises

question 5

Multiple Choice

Which of the following is an explanation of banking crises?

• A)Many banks make the same mistake: investing in an asset bubble.
• B)Banks engage in maturity transformation.
• C)The Federal Reserve, acting as a lender of last resort, introduces too much competition into the system.
• D)Banks are paying low interest rates on deposits and charging high interest rates on loans.

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Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the degree to which a firm can increase its profits by increasing sales.

Fixed Operating Costs

Expenses that do not change with the volume of production, such as salaries and rent.

Variable Costs

Expenses that vary directly with the level of production or sales volume, such as raw materials and direct labor costs.

Breakeven Volume

The quantity of goods or services that must be sold to cover fixed and variable costs, resulting in no profit or loss.