Question 1

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 2

In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by ________ firms' and households' interest payments,thereby ________ their cash flow.

Accepted Answer

A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; decreasing 
D) decreasing; increasing 
A) increasing; increasing 
B) increasing; decreasing 
C) decreasing; decreasing 
D) decreasing; increasing

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

If debt contracts are denominated in foreign currency,then an unanticipated decline in the value of the domestic currency 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 5

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 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

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 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

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 10

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% 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% from its peak.

Question 11

Factors likely to cause a financial crisis in emerging market countries include

Accepted Answer

A) fiscal imbalances. 
B) decreases in foreign interest rates. 
C) a foreign exchange crisis. 
D) too strong oversight of the financial industry. 
A) fiscal imbalances. 
B) decreases in foreign interest rates. 
C) a foreign exchange crisis. 
D) too strong oversight of the financial industry.

Question 12

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 13

Many 19th century U.S.financial crises were started by

Accepted Answer

A) spikes in interest rates. 
B) financial innovation. 
C) onerous financial regulations. 
D) a strong improvement in banks' balance sheets. 
A) spikes in interest rates. 
B) financial innovation. 
C) onerous financial regulations. 
D) a strong improvement in banks' balance sheets.

Question 14

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 15

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

Question 16

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.

Question 17

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except

Accepted Answer

A) adjustable-rate mortgages. 
B) subprime mortgages. 
C) Alt-A mortgages. 
D) mortgage-backed securities. 
A) adjustable-rate mortgages. 
B) subprime mortgages. 
C) Alt-A mortgages. 
D) mortgage-backed securities.

Question 18

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 19

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.

Accepted Answer

A) net worth; less 
B) net worth; more 
C) liability; less 
D) liability; more 
A) net worth; less 
B) net worth; more 
C) liability; less 
D) liability; more

Question 20

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets,but did not lead to worsening financial market conditions in East Asia in 1997-1998 include

Accepted Answer

A) rise in interest rates abroad. 
B) bankers' lack of expertise in screening and monitoring borrowers. 
C) deterioration of banks' balance sheets because of increasing loan losses. 
D) stock market decline. 
A) rise in interest rates abroad. 
B) bankers' lack of expertise in screening and monitoring borrowers. 
C) deterioration of banks' balance sheets because of increasing loan losses. 
D) stock market decline.

Exam 9: Financial Crises and the Subprime Meltdown

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

In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by ________ firms' and households' interest payments,thereby ________ their cash flow.

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

If debt contracts are denominated in foreign currency,then an unanticipated decline in the value of the domestic currency results in

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

Severe fiscal imbalances can directly trigger a currency crisis since

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

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.

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

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

Factors likely to cause a financial crisis in emerging market countries include

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

Many 19th century U.S.financial crises were started by

In a bank panic,the source of contagion is the

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

A serious consequence of a financial crisis is

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except

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

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets,but did not lead 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 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

Filters

In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by firms' and households' interest payments,thereby their cash flow.

A sharp decline in the stock market means that the of corporations has fallen making lenders willing to lend.