Question 1

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 2

Debt deflation occurs when

Accepted Answer

A)  an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. 
B)  rising interest rates worsen adverse selection and moral hazard problems. 
C)  lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. 
D)  corporations pay back their loans before the scheduled maturity date. 
A)  an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. 
B)  rising interest rates worsen adverse selection and moral hazard problems. 
C)  lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. 
D)  corporations pay back their loans before the scheduled maturity date.

Question 3

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 4

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

Accepted Answer

The deterioration in bank balance sheets

Question 5

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral,the "haircut" is

Accepted Answer

A)  5%. 
B)  10%. 
C)  20%. 
D)  50%. 
A)  5%. 
B)  10%. 
C)  20%. 
D)  50%.

Question 6

Severe fiscal imbalances can directly trigger a currency crisis since

Accepted Answer

A)  investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. 
B)  the government may stop printing money. 
C)  the government may have to cut back on spending. 
D)  the currency must surely increase in value. 
A)  investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. 
B)  the government may stop printing money. 
C)  the government may have to cut back on spending. 
D)  the currency must surely increase in value.

Question 7

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 8

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 9

In a bank panic,the source of contagion is the

Accepted Answer

A)  free-rider problem. 
B)  too-big-to-fail problem. 
C)  transactions cost problem. 
D)  asymmetric information problem. 
A)  free-rider problem. 
B)  too-big-to-fail problem. 
C)  transactions cost problem. 
D)  asymmetric information problem.

Question 10

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 11

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.

Question 12

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

Question 13

________ is a process of bundling together smaller loans (like mortgages)into standard debt securities.

Accepted Answer

A)  Securitization 
B)  Origination 
C)  Debt deflation 
D)  Distribution 
A)  Securitization 
B)  Origination 
C)  Debt deflation 
D)  Distribution

Question 14

Financial crises generally develop along two basic paths:

Accepted Answer

A)  mismanagement of financial liberalization/globalization and severe fiscal imbalances. 
B)  stock market declines and severe fiscal imbalances. 
C)  mismanagement of financial liberalization/globalization and stock market declines. 
D)  stock market declines and unanticipated declines in the value of the domestic currency. 
A)  mismanagement of financial liberalization/globalization and severe fiscal imbalances. 
B)  stock market declines and severe fiscal imbalances. 
C)  mismanagement of financial liberalization/globalization and stock market declines. 
D)  stock market declines and unanticipated declines in the value of the domestic currency.

Question 15

Financial crises in advanced economies might start from a

Accepted Answer

A)  debt deflation. 
B)  currency crisis. 
C)  mismanagement of financial innovations. 
D)  currency mismatch. 
A)  debt deflation. 
B)  currency crisis. 
C)  mismanagement of financial innovations. 
D)  currency mismatch.

Question 16

In emerging market countries,many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency

Accepted Answer

A)  results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged. 
B)  results in an increase in the value of the firm's assets. 
C)  means that the firm does not owe as much on their foreign debt. 
D)  strengthens their balance sheet in terms of the domestic currency. 
A)  results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged. 
B)  results in an increase in the value of the firm's assets. 
C)  means that the firm does not owe as much on their foreign debt. 
D)  strengthens their balance sheet in terms of the domestic currency.

Question 17

Argentina's financial crisis was due to

Accepted Answer

A)  poor supervision of the banking system. 
B)  a lending boom prior to the crisis. 
C)  fiscal imbalances. 
D)  lack of expertise in screening and monitoring borrowers at banking institutions. 
A)  poor supervision of the banking system. 
B)  a lending boom prior to the crisis. 
C)  fiscal imbalances. 
D)  lack of expertise in screening and monitoring borrowers at banking institutions.

Question 18

In emerging market countries,the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries.

Accepted Answer

A)  negative 
B)  positive 
C)  affirming 
D)  advancing 
A)  negative 
B)  positive 
C)  affirming 
D)  advancing

Question 19

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 20

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession.This process is called

Accepted Answer

A)  debt deflation. 
B)  moral hazard. 
C)  insolvency. 
D)  illiquidity. 
A)  debt deflation. 
B)  moral hazard. 
C)  insolvency. 
D)  illiquidity.

Exam 9: Financial Crises

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

Debt deflation occurs when

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

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

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral,the "haircut" is

Severe fiscal imbalances can directly trigger a currency crisis since

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

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.

In a bank panic,the source of contagion is the

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

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

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

________ is a process of bundling together smaller loans (like mortgages)into standard debt securities.

Financial crises generally develop along two basic paths:

Financial crises in advanced economies might start from a

In emerging market countries,many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency

Argentina's financial crisis was due to

In emerging market countries,the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries.

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

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession.This process is called

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

Filters