Question 1

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

Accepted Answer

A) credit boom. 
B) credit bust. 
C) deleveraging. 
D) market race. 
A) credit boom. 
B) credit bust. 
C) deleveraging. 
D) market race. A

Question 2

When financial intermediaries deleverage,firms cannot fund investment opportunities resulting in

Accepted Answer

A) a contraction of economic activity. 
B) an economic boom. 
C) an increased opportunity for growth. 
D) a call for government regulation. 
A) a contraction of economic activity. 
B) an economic boom. 
C) an increased opportunity for growth. 
D) a call for government regulation. A

Question 3

A serious consequence of a financial crisis is

Accepted Answer

A) a contraction in economic activity. 
B) an increase in asset prices. 
C) financial engineering. 
D) financial globalization. 
A) a contraction in economic activity. 
B) an increase in asset prices. 
C) financial engineering. 
D) financial globalization. A

Question 4

Which investment bank filed for bankruptcy on September 15,2008 making it the largest bankruptcy filing in U.S.history?

Accepted Answer

A) Lehman Brothers 
B) Merrill Lynch 
C) Bear Stearns 
D) Goldman Sachs 
A) Lehman Brothers 
B) Merrill Lynch 
C) Bear Stearns 
D) Goldman Sachs

Question 5

Agency problems in the subprime mortgage market included all of the following except

Accepted Answer

A) homeowners could refinance their houses with larger loans when their homes appreciated in value. 
B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. 
C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. 
D) the evaluators of securities,the credit rating agencies,were subject to conflicts of interest. 
A) homeowners could refinance their houses with larger loans when their homes appreciated in value. 
B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. 
C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. 
D) the evaluators of securities,the credit rating agencies,were subject to conflicts of interest.

Question 6

The economy recovers quickly from most recessions,but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

Accepted Answer

A) debt deflation 
B) illiquidity 
C) an improvement in banks' balance sheets 
D) increases in bond prices 
A) debt deflation 
B) illiquidity 
C) an improvement in banks' balance sheets 
D) increases in bond prices

Question 7

When housing prices began to decline after their peak in 2006,many subprime borrowers found that their mortgages were "underwater." This meant that

Accepted Answer

A) the value of the house fell below the amount of the mortgage. 
B) the basement flooded since they could not afford to fix the leaky plumbing. 
C) the roof leaked during a rainstorm. 
D) the amount that they owed on their mortgage was less than the value of their house. 
A) the value of the house fell below the amount of the mortgage. 
B) the basement flooded since they could not afford to fix the leaky plumbing. 
C) the roof leaked during a rainstorm. 
D) the amount that they owed on their mortgage was less than the value of their house.

Question 8

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.

Accepted Answer

A) principal-agent 
B) debt deflation 
C) democratization of credit 
D) collateralized debt 
A) principal-agent 
B) debt deflation 
C) democratization of credit 
D) collateralized debt

Question 9

The key factor leading to the financial crises in Mexico and the East Asian countries was

Accepted Answer

A) a deterioration in banks' balance sheets because of increasing loan losses. 
B) severe fiscal imbalances. 
C) a sharp increase in the stock market. 
D) a sharp decline in interest rates. 
A) a deterioration in banks' balance sheets because of increasing loan losses. 
B) severe fiscal imbalances. 
C) a sharp increase in the stock market. 
D) a sharp decline in interest rates.

Question 10

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include

Accepted Answer

A) failure of the Mexican oil monopoly. 
B) the ratification of the North American Free Trade Agreement. 
C) increased uncertainty from political shocks. 
D) decline in interest rates. 
A) failure of the Mexican oil monopoly. 
B) the ratification of the North American Free Trade Agreement. 
C) increased uncertainty from political shocks. 
D) decline in interest rates.

Question 11

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system

Accepted Answer

A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. 
B) allows for a more efficient use of funds. 
C) increases economic activity. 
D) reduces uncertainty in the economy and increases market efficiency. 
A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. 
B) allows for a more efficient use of funds. 
C) increases economic activity. 
D) reduces uncertainty in the economy and increases market efficiency.

Question 12

Most U.S.financial crises have started during periods of ________ either after the start of a recession or a stock market crash.

Accepted Answer

A) high uncertainty 
B) low interest rates 
C) low asset prices 
D) high financial regulation 
A) high uncertainty 
B) low interest rates 
C) low asset prices 
D) high financial regulation

Question 13

What two key factors trigger speculative attacks leading to currency cries in emerging market countries?

Accepted Answer

The deterioration in bank balance sheets

Question 14

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan.This created a

Accepted Answer

A) severe adverse selection problem. 
B) decline in mortgage applications. 
C) call to deregulate the industry. 
D) decrease in the demand for houses. 
A) severe adverse selection problem. 
B) decline in mortgage applications. 
C) call to deregulate the industry. 
D) decrease in the demand for houses.

Question 15

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks,the country experiences a(n)

Accepted Answer

A) banking crisis. 
B) financial recovery. 
C) reduction of the adverse selection and moral hazard problems. 
D) increase in information available to investors. 
A) banking crisis. 
B) financial recovery. 
C) reduction of the adverse selection and moral hazard problems. 
D) increase in information available to investors.

Question 16

Typically,the economy recovers fairly quickly from a recession.Why did this not happen in the United States during the Great Depression?

Accepted Answer

The 25% decline in the price level from

Question 17

At the time of the South Korean financial crisis,the merchant banks were

Accepted Answer

A) almost virtually unregulated. 
B) subject to heavy government regulation. 
C) engaged in long-term lending to the corporate sector. 
D) restricted to long-term foreign borrowing. 
A) almost virtually unregulated. 
B) subject to heavy government regulation. 
C) engaged in long-term lending to the corporate sector. 
D) restricted to long-term foreign borrowing.

Question 18

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital.The Korean government responded by

Accepted Answer

A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions. 
B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. 
C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions. 
D) not allowing any foreign borrowing by financial institutions. 
A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions. 
B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. 
C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions. 
D) not allowing any foreign borrowing by financial institutions.

Question 19

The mismanagement of financial liberalization in emerging market countries can be understood as a severe

Accepted Answer

A) principal/agent problem. 
B) asymmetric information problem. 
C) lemons problem. 
D) free-rider problem. 
A) principal/agent problem. 
B) asymmetric information problem. 
C) lemons problem. 
D) free-rider problem.

Question 20

A credit boom can lead to a(n)________ such as we saw in the tech stock market in the late 1990s.

Accepted Answer

A) asset-price bubble 
B) liability war 
C) decline in lending 
D) decrease in moral hazard 
A) asset-price bubble 
B) liability war 
C) decline in lending 
D) decrease in moral hazard

Exam 9: Financial Crises

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

When financial intermediaries deleverage,firms cannot fund investment opportunities resulting in

A serious consequence of a financial crisis is

Which investment bank filed for bankruptcy on September 15,2008 making it the largest bankruptcy filing in U.S.history?

Agency problems in the subprime mortgage market included all of the following except

The economy recovers quickly from most recessions,but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

When housing prices began to decline after their peak in 2006,many subprime borrowers found that their mortgages were "underwater." This meant that

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.

The key factor leading to the financial crises in Mexico and the East Asian countries was

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system

Most U.S.financial crises have started during periods of ________ either after the start of a recession or a stock market crash.

What two key factors trigger speculative attacks leading to currency cries in emerging market countries?

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan.This created a

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks,the country experiences a(n)

Typically,the economy recovers fairly quickly from a recession.Why did this not happen in the United States during the Great Depression?

At the time of the South Korean financial crisis,the merchant banks were

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital.The Korean government responded by

The mismanagement of financial liberalization in emerging market countries can be understood as a severe

A credit boom can lead to a(n)________ such as we saw in the tech stock market in the late 1990s.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

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