Question 1

In an emerging market economy, a financial crisis generally begins with

Accepted Answer

A) mismanagement of financial liberalization or innovation. 
B) asset pricing booms and busts. 
C) an increase in uncertainty caused by failure of financial institutions. 
D) all of the above. 
A) mismanagement of financial liberalization or innovation. 
B) asset pricing booms and busts. 
C) an increase in uncertainty caused by failure of financial institutions. 
D) all of the above.

Question 2

During the 1800s, many U.S. financial crises were precipitated by an increase in ________, often originating in London.

Accepted Answer

A) interest rates 
B) housing prices 
C) gasoline prices 
D) heating oil prices 
A) interest rates 
B) housing prices 
C) gasoline prices 
D) heating oil prices

Question 3

Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.

Accepted Answer

The sequence of events in a financial cr

Question 4

Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults.

Accepted Answer

A) True 
 B)False

Question 5

Why was the shadow banking system important during the 2007-2009 U.S. financial crisis?

Accepted Answer

The shadow banking system played a cruci

Question 6

In an emerging market economy, a country often faces severe fiscal imbalances before a financial crisis initiates.

Accepted Answer

A) True 
 B)False

Question 7

Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.

Accepted Answer

A) True 
 B)False

Question 8

Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.

Accepted Answer

Stage Two of a financial crisis in an ad

Question 9

Approximately how large was the U.S. subprime mortgage market in 2007?

Accepted Answer

A) $100 million 
B) $100 billion 
C) $500 billion 
D) $1 trillion 
A) $100 million 
B) $100 billion 
C) $500 billion 
D) $1 trillion

Question 10

In the second stage of a financial crisis in an emerging economy, a speculative currency attack begins. Why can't the government defend itself from such an attack?

Accepted Answer

In the second stage of a financial crisi

Question 11

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

Accepted Answer

A) currency 
B) stock market 
C) banking 
D) commodities 
A) currency 
B) stock market 
C) banking 
D) commodities

Question 12

The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed.

Accepted Answer

A) True 
 B)False

Question 13

Because asset markets are relatively small in an emerging market, they play less of a prominent role in a financial crisis in those economies.

Accepted Answer

A) True 
 B)False

Question 14

Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.

Accepted Answer

A financial crisis in an advanced econom

Question 15

What is a credit boom?

Accepted Answer

A) an explosion in a credit cycle, which can increase or decrease lending in the short-run 
B) essentially a lending spree on the part of banks and other financial institutions 
C) when credit card receivables rise due to low initial interest rates 
D) the signal of the end of a credit spree, with credit contracting rapidly 
A) an explosion in a credit cycle, which can increase or decrease lending in the short-run 
B) essentially a lending spree on the part of banks and other financial institutions 
C) when credit card receivables rise due to low initial interest rates 
D) the signal of the end of a credit spree, with credit contracting rapidly

Question 16

Most financial crises in the United States have begun with

Accepted Answer

A) a steep stock market decline. 
B) an increase in uncertainty resulting from the failure of a major firm. 
C) a steep decline in interest rates. 
D) all of the above. 
E) only A and B of the above. 
A) a steep stock market decline. 
B) an increase in uncertainty resulting from the failure of a major firm. 
C) a steep decline in interest rates. 
D) all of the above. 
E) only A and B of the above.

Question 17

When asset prices fall following a boom,

Accepted Answer

A) moral hazard may increase in companies that have lost net worth in the bust. 
B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. 
C) both A and B are correct. 
D) none of the above are correct. 
A) moral hazard may increase in companies that have lost net worth in the bust. 
B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. 
C) both A and B are correct. 
D) none of the above are correct.

Question 18

Financial crises

Accepted Answer

A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. 
B) are a recent phenomenon that occur only in developing countries. 
C) invariably lead to debt deflation. 
D) all of the above. 
E) none of the above. 
A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. 
B) are a recent phenomenon that occur only in developing countries. 
C) invariably lead to debt deflation. 
D) all of the above. 
E) none of the above.

Question 19

Financial crises

Accepted Answer

A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. 
B) occur when adverse selection and moral hazard problems in financial markets become more significant. 
C) frequently lead to sharp contractions in economic activity. 
D) are all of the above. 
E) are only A and B of the above. 
A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. 
B) occur when adverse selection and moral hazard problems in financial markets become more significant. 
C) frequently lead to sharp contractions in economic activity. 
D) are all of the above. 
E) are only A and B of the above.

Question 20

Which of the following factors led up to the Mexican financial crisis of 1994?

Accepted Answer

A) speculative attacks on the peso and a rise in actual and expected inflation 
B) a rise in domestic interest rates and a deterioration in bank balance sheets 
C) a rise in foreign interest rates and domestic stock market declines 
D) all of the above 
E) only B and C of the above 
A) speculative attacks on the peso and a rise in actual and expected inflation 
B) a rise in domestic interest rates and a deterioration in bank balance sheets 
C) a rise in foreign interest rates and domestic stock market declines 
D) all of the above 
E) only B and C of the above

Exam 8: Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

In an emerging market economy, a financial crisis generally begins with

During the 1800s, many U.S. financial crises were precipitated by an increase in ________, often originating in London.

Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.

Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults.

Why was the shadow banking system important during the 2007-2009 U.S. financial crisis?

In an emerging market economy, a country often faces severe fiscal imbalances before a financial crisis initiates.

Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.

Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.

Approximately how large was the U.S. subprime mortgage market in 2007?

In the second stage of a financial crisis in an emerging economy, a speculative currency attack begins. Why can't the government defend itself from such an attack?

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed.

Because asset markets are relatively small in an emerging market, they play less of a prominent role in a financial crisis in those economies.

Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.

What is a credit boom?

Most financial crises in the United States have begun with

When asset prices fall following a boom,

Financial crises

Financial crises

Which of the following factors led up to the Mexican financial crisis of 1994?

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

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