Question 1

As housing prices rose,many subprime borrowers were able to ________.

Accepted Answer

A)  default on their mortgage 
B)  reduce their loan-to-value ratio 
C)  get piggyback mortgages 
D)  walk away from their houses 
A)  default on their mortgage 
B)  reduce their loan-to-value ratio 
C)  get piggyback mortgages 
D)  walk away from their houses

Question 2

Financial crises in emerging-market economies 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 3

Between 1995 and 2007,Ireland had an average annual GDP growth rate of ________.

Accepted Answer

A)  10.1 percent 
B)  6.3 percent 
C)  8.3 percent 
D)  5.7 percent 
A)  10.1 percent 
B)  6.3 percent 
C)  8.3 percent 
D)  5.7 percent

Question 4

Government safety nets ________.

Accepted Answer

A)  weaken market discipline 
B)  reduce moral hazard 
C)  incent banks to take less risk 
D)  require banks to loan less funds 
A)  weaken market discipline 
B)  reduce moral hazard 
C)  incent banks to take less risk 
D)  require banks to loan less funds

Question 5

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 6

Increased complexity of structured products can ________.

Accepted Answer

A)  destroy information and improve adverse selection problems 
B)  increase information and worsen adverse selection problems 
C)  make asymmetric information better in the financial system 
D)  make asymmetric information worse in the financial system 
A)  destroy information and improve adverse selection problems 
B)  increase information and worsen adverse selection problems 
C)  make asymmetric information better in the financial system 
D)  make asymmetric information worse in the financial system

Question 7

The economic hardship resulting from a financial crises is severe,however,there are also social consequences such as ________.

Accepted Answer

A)  increased crime 
B)  difficulty getting a loan 
C)  currency devaluations 
D)  loss of output 
A)  increased crime 
B)  difficulty getting a loan 
C)  currency devaluations 
D)  loss of output

Question 8

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 9

Factors that lead to worsening conditions in financial system include ________.

Accepted Answer

A)  increases in net worth 
B)  unanticipated increases in the price level 
C)  unanticipated increases in the value of the domestic currency 
D)  unanticipated declines in the value of the domestic currency 
A)  increases in net worth 
B)  unanticipated increases in the price level 
C)  unanticipated increases in the value of the domestic currency 
D)  unanticipated declines in the value of the domestic currency

Question 10

An economic downturn which causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness results in ________.

Accepted Answer

A)  asset bubbles 
B)  rising interest rates 
C)  debt deflation 
D)  financial recovery 
A)  asset bubbles 
B)  rising interest rates 
C)  debt deflation 
D)  financial recovery

Question 11

Economic hardship resulting from a financial crises includes ________.

Accepted Answer

A)  increased crime 
B)  ethnic violence 
C)  currency appreciation 
D)  high unemployment 
A)  increased crime 
B)  ethnic violence 
C)  currency appreciation 
D)  high unemployment

Question 12

If debt contracts are of fairly long maturity,then an unanticipated decline in the aggregate price level results in ________.

Accepted Answer

A)  a decline in a firm's net worth 
B)  an increase in a firm's net worth 
C)  a decrease in adverse selection and moral hazard 
D)  an increase in willingness to lend 
A)  a decline in a firm's net worth 
B)  an increase in a firm's net worth 
C)  a decrease in adverse selection and moral hazard 
D)  an increase in willingness to lend

Question 13

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

Question 14

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 15

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

Question 16

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except ________.

Accepted Answer

A)  increase in housing market prices 
B)  increased uncertainty from the failures of financial institutions 
C)  deterioration in financial institutions' balance sheets 
D)  decline in the stock market of over 40 percent from its peak 
A)  increase in housing market prices 
B)  increased uncertainty from the failures of financial institutions 
C)  deterioration in financial institutions' balance sheets 
D)  decline in the stock market of over 40 percent from its peak

Question 17

When the value of loans begins to drop,the net worth of financial institutions falls causing them to cut back on lending in a process called ________.

Accepted Answer

A)  deflation 
B)  releveraging 
C)  capitulation 
D)  deleveraging 
A)  deflation 
B)  releveraging 
C)  capitulation 
D)  deleveraging

Question 18

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets included ________.

Accepted Answer

A)  fall in interest rates abroad 
B)  a large increase in lending 
C)  decreases in the price level 
D)  strong supervision by bank regulators 
A)  fall in interest rates abroad 
B)  a large increase in lending 
C)  decreases in the price level 
D)  strong supervision by bank regulators

Question 19

Under the Montreal Accord investors ________.

Accepted Answer

A)  froze losses to $200 million 
B)  agreed to a standstill period 
C)  were bailed out by the Bank of Canada 
D)  were bailed out by the CDIC 
A)  froze losses to $200 million 
B)  agreed to a standstill period 
C)  were bailed out by the Bank of Canada 
D)  were bailed out by the CDIC

Question 20

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include ________.

Accepted Answer

A)  weak supervision by bank regulators 
B)  a rise in interest rates abroad 
C)  unanticipated increases in the price level 
D)  increased uncertainty from political shocks 
A)  weak supervision by bank regulators 
B)  a rise in interest rates abroad 
C)  unanticipated increases in the price level 
D)  increased uncertainty from political shocks

Exam 9: Financial Crises

As housing prices rose,many subprime borrowers were able to ________.

Financial crises in emerging-market economies generally develop along two basic paths: ________.

Between 1995 and 2007,Ireland had an average annual GDP growth rate of ________.

Government safety nets ________.

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.

Increased complexity of structured products can ________.

The economic hardship resulting from a financial crises is severe,however,there are also social consequences such as ________.

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

Factors that lead to worsening conditions in financial system include ________.

An economic downturn which causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness results in ________.

Economic hardship resulting from a financial crises includes ________.

If debt contracts are of fairly long maturity,then an unanticipated decline in the aggregate price level results in ________.

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

Debt deflation occurs when ________.

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

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except ________.

When the value of loans begins to drop,the net worth of financial institutions falls causing them to cut back on lending in a process called ________.

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets included ________.

Under the Montreal Accord investors ________.

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include ________.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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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