Question 1

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 2

The growth of the subprime mortgage market led to

Accepted Answer

A) increased demand for houses and helped fuel the boom in housing prices. 
B) a decline in the housing industry because of higher default risk. 
C) a decrease in home ownership as investors chose other assets over housing. 
D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages. 
A) increased demand for houses and helped fuel the boom in housing prices. 
B) a decline in the housing industry because of higher default risk. 
C) a decrease in home ownership as investors chose other assets over housing. 
D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.

Question 3

An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms' assets.The result is

Accepted Answer

A) that net worth in real terms declines. 
B) that adverse selection and moral hazard problems are reduced. 
C) an increase in the real net worth of the borrowing firm. 
D) an increase in lending. 
A) that net worth in real terms declines. 
B) that adverse selection and moral hazard problems are reduced. 
C) an increase in the real net worth of the borrowing firm. 
D) an increase in lending.

Question 4

In emerging economies,government fiscal imbalances may cause fears of

Accepted Answer

A) debt deflation. 
B) default on government debt. 
C) stock price declines. 
D) lower interest rates. 
A) debt deflation. 
B) default on government debt. 
C) stock price declines. 
D) lower interest rates.

Question 5

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 6

The government bailout of troubled financial institutions occurred in the U.S.and many other countries.Which country saw their banking system collapse requiring the government to take over its three largest banks?

Accepted Answer

A) Iceland 
B) England 
C) Germany 
D) Belgium 
A) Iceland 
B) England 
C) Germany 
D) Belgium

Question 7

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.

Question 8

Before the South Korean financial crisis,sales by the top five chaebols (family-owned conglomerates)were

Accepted Answer

A) nearly 50% of GDP. 
B) about 10% of GDP. 
C) almost 90% of GDP. 
D) nearly 25% of GDP. 
A) nearly 50% of GDP. 
B) about 10% of GDP. 
C) almost 90% of GDP. 
D) nearly 25% of GDP.

Question 9

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 10

Like a CDO,a structured investment vehicle pays off cash flows from pools of assets,however,rather than long-term debt the structured investment vehicle backs

Accepted Answer

A) commercial paper. 
B) Treasury notes. 
C) corporate bonds. 
D) municipal bonds. 
A) commercial paper. 
B) Treasury notes. 
C) corporate bonds. 
D) municipal bonds.

Question 11

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches,with the highest-rated tranch paying out first,while lower ones paid out less if there were losses on the mortgage-backed securities.

Accepted Answer

A) Collateralized debt obligation (CDO) 
B) Adjustable-rate mortgage 
C) Negotiable CD 
D) Discount bond 
A) Collateralized debt obligation (CDO) 
B) Adjustable-rate mortgage 
C) Negotiable CD 
D) Discount bond

Question 12

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 13

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 14

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 15

A sharp stock market decline increases moral hazard incentives

Accepted Answer

A) since borrowing firms have less to lose if their investments fail. 
B) because it is immoral to profit from someone's loss. 
C) since lenders are more willing to make loans. 
D) reducing uncertainty in the economy and increasing market efficiency. 
A) since borrowing firms have less to lose if their investments fail. 
B) because it is immoral to profit from someone's loss. 
C) since lenders are more willing to make loans. 
D) reducing uncertainty in the economy and increasing market efficiency.

Question 16

A bank panic can lead to a severe contraction in economic activity due to

Accepted Answer

A) a decline in international trade. 
B) the losses of bank shareholders. 
C) the losses of bank depositors. 
D) a decline in lending for productive investment. 
A) a decline in international trade. 
B) the losses of bank shareholders. 
C) the losses of bank depositors. 
D) a decline in lending for productive investment.

Question 17

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 18

The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis.These provisions included all of the following except

Accepted Answer

A) guaranteed all the deposits of the commercial banks. 
B) purchase of subprime mortgage assets from troubled financial institutions by the Treasury. 
C) temporarily raised the limit of the federal deposit insurance from $100,000 to $250,000. 
D) guarantee of par value for money market mutual fund shares for one year by the Treasury. 
A) guaranteed all the deposits of the commercial banks. 
B) purchase of subprime mortgage assets from troubled financial institutions by the Treasury. 
C) temporarily raised the limit of the federal deposit insurance from $100,000 to $250,000. 
D) guarantee of par value for money market mutual fund shares for one year by the Treasury.

Question 19

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

Accepted Answer

A) financial crisis. 
B) fiscal imbalance. 
C) free-rider problem. 
D) "lemons" problem. 
A) financial crisis. 
B) fiscal imbalance. 
C) free-rider problem. 
D) "lemons" problem.

Question 20

How can asymmetric information lead to a bank panic?

Accepted Answer

Depositors cannot judge the quality of t

Exam 9: Financial Crises and the Subprime Meltdown

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

The growth of the subprime mortgage market led to

An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms' assets.The result is

In emerging economies,government fiscal imbalances may cause fears of

Argentina's financial crisis was due to

The government bailout of troubled financial institutions occurred in the U.S.and many other countries.Which country saw their banking system collapse requiring the government to take over its three largest banks?

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

Before the South Korean financial crisis,sales by the top five chaebols (family-owned conglomerates)were

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

Like a CDO,a structured investment vehicle pays off cash flows from pools of assets,however,rather than long-term debt the structured investment vehicle backs

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches,with the highest-rated tranch paying out first,while lower ones paid out less if there were losses on the mortgage-backed securities.

Financial crises generally develop along two basic paths:

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

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

A sharp stock market decline increases moral hazard incentives

A bank panic can lead to a severe contraction in economic activity due to

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

The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis.These provisions included all of the following except

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

How can asymmetric information lead to a bank panic?

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 for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

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