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Chapter 8 39 terms jhwdds

Terms in this set (39)

1) Financial crises D) are all 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

2) Financial crises E) none of the above.

A) cause failures of
financial intermediaries
and leave only
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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.

3) In an advanced D) all of the above.

economy, a financial
crisis can begin in
several ways, including
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.

4) What is a credit B) Essentially a lending spree on the part of banks and

boom? other financial institutions
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

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receivables rise due to

low initial interest rates
D) The signal of the end
of a credit spree, with
credit contracting
rapidly

5) The process of A) cutbacks in lending by financial institutions.

deleveraging refers to
A) cutbacks in lending
by financial institutions.
B) a reduction in debt
owed by banks.
C) both A and B.
D) none of the above.

6) When asset prices C) both A and B are correct.

fall following a boom,
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.

7) During the 1800s, A) interest rates

many U.S. financial
crises were precipitated
by an increase in ________,
often originating in
London.
A) interest rates

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B) housing prices
C) gasoline prices
D) heating oil prices

8) Stage Two of a C) banking

financial crisis in an
advanced economy
usually involves a ________
crisis.
A) currency
B) stock market
C) banking
D) commodities

9) Stage Three of a B) debt deflation.

financial crisis in an
advanced economy
features
A) a general increase in
inflation.
B) debt deflation.
C) an increase in
general price levels.
D) a full-fledged
financial crisis

10) Debt deflation refers D) a decline in net worth as price levels fall while debt
to burden remains unchanged.
A) an increase in net
worth, leading to a
relative fall in general
debt levels.
B) a decline in general
debt levels due to
deleveraging.
C) a decline in bond
prices as default rates
rise.
D) a decline in net

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worth as price levels fall

while debt burden
remains unchanged.

11) Factors that lead to D) all of the above.

worsening conditions in
financial markets
include
A) increases in interest
rates.
B) declining stock
prices.
C) increasing
uncertainty in financial
markets.
D) all of the above.
E) only A and B of the
above.

12) Factors that lead to C) bank panics.

worsening conditions in
financial markets
include
A) declining interest
rates.
B) anticipated increases
in the price level.
C) bank panics.
D) only A and C of the
above.
E) only B and C of the
above.

13) Most financial crises E) only A and B of the above.

in the United States
have begun with
A) a steep stock market
decline.
B) an increase in

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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.

14) In addition to having B) increasing; decreasing

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

15) Adverse selection D) a result of all of the above.

and moral hazard
problems increased in
magnitude during the
early years of the Great
Depression as
A) stock prices declined
to 10 percent of their
levels in 1929.

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B) banks failed.
C) the aggregate price
level declined.
D) a result of all of the
above.
E) a result of A and B of
the above.

16) Stock market C) in the United States in 1929.

declines preceded a
full-blown financial
crisis
A) in the United States
in 1987.
B) in the United States
in 2000.
C) in the United States
in 1929.
D) in all of the above.
E) in none of the above.

17) Which of the E) only B and C of the above

following factors led up
to the Greece debt
crisis in 2009-2010?
A) Speculative attacks
on the euro and a rise in
actual and expected
inflation
B) A decline in tax
revenues resulting from
a contraction in
economic activity
C) A double-digit
budget deficit
D) All of the above
E) only B and C of the
above

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18) What is a A) A tranche of an SPV that has been setup based on

collateralized debt default risk
obligation?
A) A tranche of an SPV
that has been setup
based on default risk
B) An agreement to
exchange interest
payments when one
party defaults
C) A type of insurance
against defaults
D) A contract between
credit rating agencies

19) Which of the E) only A and B of the above

following led to the U.S.
financial crisis of 2007-
2009?
A) Financial innovation
in mortgage markets
B) Agency problems in
mortgage markets
C) An increase in moral
hazard at credit rating
agencies
D) All of the above
E) only A and B of the
above

20) Approximately how D) $1 trillion

large was the U.S.
subprime mortgage
market in 2007?
A) $100 million
B) $100 billion
C) $500 billion
D) $1 trillion

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21) When we refer to the A) Hedge funds, investment banks, and other nonbank
shadow banking financial firms that supply liquidity
system, what are we
talking about?
A) Hedge funds,
investment banks, and
other nonbank financial
firms that supply
liquidity
B) The "underground"
banking system used for
illegal activities
C) The subsidiaries of
depository institutions
D) None of the above

22) The impact of the D) all of the above.

2007-2009 financial
crisis was widespread,
including
A) the first major bank
failure in the UK in over
100 years.
B) the failure of Bear
Stearns, the fifth-largest
U.S. investment bank.
C) the bailout of Fannie
Mae and Freddie Mac
by the U.S. Treasury.
D) all of the above.
E) only B and C of the
above.

1) A financial crisis Answer: TRUE

occurs when
information flows in
financial markets
experience a

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particularly large
disruption.

2) Factors that can lead Answer: TRUE

to worsening conditions
in financial markets
include increasing
interest rates and asset
price booms.

3) During a bank panic, Answer: TRUE

many banks fail in a very
short time period.

4) The failure of Ohio Answer: FALSE

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

5) Bank failures have Answer: TRUE

been a feature of all
U.S. financial crises from
1800 to 1944.

6) Debt deflation refers Answer: FALSE

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

7) The Internet stock Answer: FALSE

market bubble of the
late 1990s led to one of
the worst financial
crises in U.S. history.
Banks lost billions of
dollars as Internet

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companies went
bankrupt.

8) An unusual feature of Answer: FALSE

the "Great Recession" in
the U.S. from 2007-2009
was that the crisis did
not spread to European
nations.

9) In Europe, Greece Answer: TRUE

was the first nation to
face a debt crisis.

1) Explain the ...

relationship between
agency theory and a
financial crisis.

2) Describe the ...

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

3) What is the problem ...

with government safety
nets, such as deposit
insurance, during the
formative stages of a
financial crisis?

4) Discuss why some ...

view the Fed as a culprit
in the U.S. housing
bubble during the
2000s.

5) Describe a special ...

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purpose vehicle. How

are they related to the
creation of
collateralized debt
obligations?

6) Discuss some of the ...

financial innovations in
mortgage markets that
led to the U.S. financial
crisis in 2007.

7) Why was the shadow ...

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

8) Describe how the ...

European debt crisis
evolved.

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