Question 1

When financial intermediaries deleverage,firms cannot fund investment opportunities resulting in ________.&#10;A) a contraction of economic activity&#10;B) an economic boom&#10;C) an increased opportunity for growth&#10;D) a call for government regulation

Accepted Answer

Deleveraging of financial intermediaries limits the availability of credit, making it difficult for firms to fund their investment projects. This results in a contraction of economic activity as there is less investment and less growth in the economy.

Question 2

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system ________.&#10;A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channelling funds efficiently&#10;B) allows for a more efficient use of funds&#10;C) increases economic activity&#10;D) reduces uncertainty in the economy and increases market efficiency

Accepted Answer

Asymmetric information leads to adverse selection and moral hazard problems that make the markets incapable of channelling funds efficiently, ultimately resulting in a financial crisis. Choices B, C, and D do not align with the characteristics of a financial crisis.

Question 3

Factors that lead to worsening conditions in financial system include ________.&#10;A) increases in net worth&#10;B) unanticipated increases in the price level&#10;C) unanticipated increases in the value of the domestic currency&#10;D) unanticipated declines in the value of the domestic currency

Accepted Answer

Unanticipated declines in the value of the domestic currency can lead to worsening conditions in the financial system, as it can cause inflation, increase in interest rates, and decrease in foreign investments. Increases in net worth would have a positive effect on the financial system, and unanticipated increases in the price level or value of the domestic currency would have neutral or mixed effects.

Question 4

Government safety nets ________.&#10;A) weaken market discipline&#10;B) reduce moral hazard&#10;C) incent banks to take less risk&#10;D) require banks to loan less funds

Accepted Answer

Government safety nets, such as deposit insurance and bailouts, reduce the consequences of bank failures for both depositors and banks themselves. This reduces the incentive for banks to take appropriate measures to manage risk and maintain their financial health, which weakens market discipline.

Question 5

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 ________.&#10;A) deflation&#10;B) releveraging&#10;C) capitulation&#10;D) deleveraging

Accepted Answer

When the value of loans drops, financial institutions may find themselves holding a large amount of non-performing assets, meaning they aren't collecting the expected returns on their loans. This can cause their net worth to fall, as they may have to write off some of those assets or set aside more capital as a buffer against potential losses. To cope with this, they may choose to reduce lending or sell off some of their assets in a process called deleveraging, which can help them restore their financial health over time.

Question 6

Factors that lead to worsening conditions in financial system include ________.&#10;A) increases in net worth&#10;B) stock market increases&#10;C) decreases in interest rates&#10;D) stock market declines

Accepted Answer

Stock market declines can lead to worsening conditions in the financial system as it can cause a decrease in investors' confidence, which can then lead to lower investment and spending, and ultimately hurt economic growth. Increases in net worth, stock market increases, and decreases in interest rates generally have positive effects on the financial system.

Question 7

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a ________.&#10;A) credit bust&#10;B) credit boom&#10;C) deleveraging&#10;D) market race

Accepted Answer

When financial institutions expand their lending at a rapid pace, it is called a credit boom. A credit boom is characterized by easy credit availability, low interest rates, and a sharp increase in lending activity. However, this can lead to over-borrowing, asset bubbles, and eventually a credit bust when the lending spree comes to an end.

Question 8

The dark side of financial liberalization is ________.&#10;A) market allocations&#10;B) credit booms&#10;C) currency appreciation&#10;D) financial innovation

Accepted Answer

Financial liberalization can lead to credit booms, which can increase the risk of financial crises and instability. This is because liberalization allows for easier access to credit and encourages borrowing, which can lead to excessive debt and speculation.

Question 9

Factors that lead to worsening conditions in financial system include ________.&#10;A) declining interest rates&#10;B) unanticipated increases in the price level&#10;C) the deterioration in banks' balance sheets&#10;D) increases in bond prices

Accepted Answer

The deterioration in banks' balance sheets can lead to worsening conditions in the financial system. Declining interest rates and increases in bond prices can actually be positive for the financial system as they can stimulate lending and investment. Unanticipated increases in the price level can lead to inflation, which can have negative effects on the economy, but it is not necessarily a direct cause of worsening conditions in the financial system.

Question 10

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.&#10;A) net worth; less&#10;B) net worth; more&#10;C) liability; less&#10;D) liability; more

Accepted Answer

A sharp decline in the stock market usually means that the net worth of corporations has fallen due to a decrease in the market value of their assets. This, in turn, would make lenders less willing to lend since the corporations' ability to repay loans may be compromised. Therefore, option A is the correct choice.

Question 11

A sharp decline in the stock market means that the ________ of corporations has fallen.&#10;A) net worth&#10;B) interest rates&#10;C) liabilities&#10;D) payrolls

Accepted Answer

The answer of A sharp decline in the stock market...

Question 12

A decline in asset prices can lead to ________.&#10;A) worsening adverse selection and moral hazard problems&#10;B) declining uncertainty&#10;C) increased economic activity&#10;D) anticipated increase in the price level

Accepted Answer

The answer of A decline in asset prices can lead...

Question 13

When there is a deterioration in financial institutions' balance sheets ________.&#10;A) economic activity contracts&#10;B) asset prices increase&#10;C) financial engineering takes place&#10;D) financial globalization increases its pace

Accepted Answer

The answer of When there is a deterioration in financial...

Question 14

Asymmetric information problems that act as a barrier to efficient allocation of capital are often described as ________.&#10;A) financial treason&#10;B) financial markets&#10;C) financial frictions&#10;D) financial allocations

Accepted Answer

The answer of Asymmetric information problems that act as a...

Question 15

Share prices are a valuation of a corporation's ________.&#10;A) collateral&#10;B) net worth&#10;C) current capital&#10;D) net earnings

Accepted Answer

The answer of Share prices are a valuation of a...

Question 16

Financial crises ________.&#10;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&#10;B) occur when adverse selection and moral hazard problems in financial markets become less significant&#10;C) frequently lead to sharp expansions in economic activity&#10;D) are a free-rider problem

Accepted Answer

The answer of Financial crises ________.&#10;A) are major disruptions in...

Question 17

In a bank panic,the source of contagion is the ________.&#10;A) free-rider problem&#10;B) too-big-to-fail problem&#10;C) transactions cost problem&#10;D) asymmetric information problem

Accepted Answer

The answer of In a bank panic,the source of contagion...

Question 18

In a bank panic ________.&#10;A) free-rider increase&#10;B) bond prices increase&#10;C) transactions costs increase&#10;D) multiple banks fail

Accepted Answer

The answer of In a bank panic ________.&#10;A) free-rider increase&#10;B)...

Question 19

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a ________.&#10;A) financial crisis&#10;B) fiscal imbalance&#10;C) free-rider problem&#10;D) &#34;lemons&#34; problem

Accepted Answer

The answer of A major disruption in financial markets characterized...

Question 20

The elimination of restrictions on financial markets and institutions is also known as ________.&#10;A) financial engineering&#10;B) financial lending&#10;C) financial liberalization&#10;D) financial deleveraging

Accepted Answer

The answer of The elimination of restrictions on financial markets...

Question 21

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession.This process is called ________.&#10;A) debt deflation&#10;B) moral hazard&#10;C) insolvency&#10;D) illiquidity

Accepted Answer

The answer of A substantial decrease in the aggregate price...

Question 22

Factors that lead to worsening conditions in financial system include ________.&#10;A) increases in net worth&#10;B) unanticipated increases in the price level&#10;C) decreases in interest rates&#10;D) unanticipated declines in the price level

Accepted Answer

The answer of Factors that lead to worsening conditions in...

Question 23

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 ________.&#10;A) that net worth in real terms declines&#10;B) that adverse selection and moral hazard problems are reduced&#10;C) an increase in the real net worth of the borrowing firm&#10;D) an increase in lending

Accepted Answer

The answer of An unanticipated decline in the price level...

Question 24

Banking crises or bank panics have started when ________.&#10;A) there is a reduction of the adverse selection and moral hazard problems&#10;B) there have been periods of low interest rates&#10;C) depositors withdraw their funds from banks&#10;D) when information is made available to investors

Accepted Answer

The answer of Banking crises or bank panics have started...

Question 25

A sharp stock market decline increases moral hazard incentives ________.&#10;A) since borrowing firms have less to lose if their investments fail&#10;B) because it is immoral to profit from someone's loss&#10;C) since lenders are more willing to make loans&#10;D) reducing uncertainty in the economy and increasing market efficiency

Accepted Answer

The answer of A sharp stock market decline increases moral...

Question 26

If the anatomy of a financial crisis is thought of as a sequence of events,which of the following events would be least likely to be the initiating cause of the financial crisis?&#10;A) Increase in interest rates&#10;B) Bank panic&#10;C) Stock market decline&#10;D) Increase in uncertainty

Accepted Answer

The answer of If the anatomy of a financial crisis...

Question 27

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except ________.&#10;A) adjustable-rate mortgages&#10;B) subprime mortgages&#10;C) Alt-A mortgages&#10;D) mortgage-backed securities

Accepted Answer

The answer of Financial innovations that emerged after 2000 in...

Question 28

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 ________.&#10;A) asset bubbles&#10;B) rising interest rates&#10;C) debt deflation&#10;D) financial recovery

Accepted Answer

The answer of An economic downturn which causes the price...

Question 29

Before 2000,most borrowers in the mortgage markets were ________.&#10;A) subprime&#10;B) credit-worthy (prime)&#10;C) risky&#10;D) less than stellar

Accepted Answer

The answer of Before 2000,most borrowers in the mortgage markets...

Question 30

Most financial crises have started during periods of ________ either after the start of a recession or a stock market crash.&#10;A) high uncertainty&#10;B) low interest rates&#10;C) low asset prices&#10;D) high financial regulation

Accepted Answer

The answer of Most financial crises have started during periods...

Question 31

The economy recovers quickly from most recessions,but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

A) debt deflation
B) illiquidity
C) an improvement in banks' balance sheets
D) increases in bond prices

Accepted Answer

The answer of The economy recovers quickly from most recessions,but...

Question 32

Debt deflation occurs when ________.&#10;A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness&#10;B) rising interest rates worsen adverse selection and moral hazard problems&#10;C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral&#10;D) corporations pay back their loans before the scheduled maturity date

Accepted Answer

The answer of Debt deflation occurs when ________.&#10;A) an economic...

Question 33

A(n)________ is an increase in prices of assets above their fundamental economic values.&#10;A) decrease in moral hazard&#10;B) asset-price bubble&#10;C) decline in lending&#10;D) liability war

Accepted Answer

The answer of A(n)________ is an increase in prices of...

Question 34

If the anatomy of a financial crisis is thought of as a sequence of events,which of the following events would be least likely to be the initiating cause of the financial crisis?&#10;A) Increase in interest rates&#10;B) Stock market decline&#10;C) Unanticipated decline in price level&#10;D) Increase in uncertainty

Accepted Answer

The answer of If the anatomy of a financial crisis...

Question 35

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks,the country experiences a(n)________.&#10;A) banking crisis&#10;B) financial recovery&#10;C) reduction of the adverse selection and moral hazard problems&#10;D) increase in information available to investors

Accepted Answer

The answer of If uncertainty about banks' health causes depositors...

Question 36

If debt contracts are of fairly long maturity,then an unanticipated decline in the aggregate price level results in ________.&#10;A) a decline in a firm's net worth&#10;B) an increase in a firm's net worth&#10;C) a decrease in adverse selection and moral hazard&#10;D) an increase in willingness to lend

Accepted Answer

The answer of If debt contracts are of fairly long...

Question 37

Mortgages for borrowers with higher expected default rates are also known as ________.&#10;A) Adjustable-rate mortgages&#10;B) Prime mortgages&#10;C) Alt-A mortgages&#10;D) Fixed-rate mortgages

Accepted Answer

The answer of Mortgages for borrowers with higher expected default...

Question 38

A bank panic can lead to a severe contraction in economic activity due to ________.&#10;A) a decline in international trade&#10;B) the losses of bank shareholders&#10;C) the losses of bank depositors&#10;D) a decline in lending for productive investment

Accepted Answer

The answer of A bank panic can lead to a...

Question 39

The start of a recession or a stock market crash can result in ________.&#10;A) high financial regulation&#10;B) low interest rates&#10;C) low asset prices&#10;D) high uncertainty

Accepted Answer

The answer of The start of a recession or a...

Question 40

A possible sequence for the three stages of a financial crisis in Canada might be ________ leads to ________ leads to ________.&#10;A) asset price declines; banking crises; unanticipated decline in price level&#10;B) unanticipated decline in price level; banking crises; increase in interest rates&#10;C) banking crises; increase in interest rates; unanticipated decline in price level&#10;D) banking crises; increase in uncertainty; increase in interest rates

Accepted Answer

The answer of A possible sequence for the three stages...

Question 41

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except ________.&#10;A) increase in housing market prices&#10;B) increased uncertainty from the failures of financial institutions&#10;C) deterioration in financial institutions' balance sheets&#10;D) decline in the stock market of over 40 percent from its peak

Accepted Answer

The answer of Credit market problems of adverse selection and...

Question 42

The housing price bubble ________.&#10;A) was aided by low interest rates on residential mortgages&#10;B) only occurred in the emerging economies&#10;C) was not a contributing factor to the 2007-2008 recession&#10;D) cannot be explained

Accepted Answer

The answer of The housing price bubble ________.&#10;A) was aided...

Question 43

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan.This created a ________.&#10;A) severe adverse selection problem&#10;B) decline in mortgage applications&#10;C) call to deregulate the industry&#10;D) decrease in the demand for houses

Accepted Answer

The answer of Mortgage brokers often did not make a...

Question 44

Credit default swaps ________.&#10;A) provide payments to holders of bonds if they default&#10;B) decrease asymmetric information in the mortgage markets&#10;C) had strong incentives to make sure CDO holders would be paid off&#10;D) were only a small part of insurance companies portfolios

Accepted Answer

The answer of Credit default swaps ________.&#10;A) provide payments to...

Question 45

Between October 2007 and March 2009,asset prices fell by ________.&#10;A) over 50 percent&#10;B) 10 percent&#10;C) around 16 percent&#10;D) less than 30 percent

Accepted Answer

The answer of Between October 2007 and March 2009,asset prices...

Question 46

The originate-to-distribute business model is when ________.&#10;A) mortgage originators made sure that the mortgage was a good credit risk&#10;B) mortgage originators distributed the mortgage to an investor as an underlying asset in a security&#10;C) homeowners could refinance their houses with larger loans when their homes appreciated in value&#10;D) mortgage originators were the credit rating agencies

Accepted Answer

The answer of The originate-to-distribute business model is when ________.&#10;A)...

Question 47

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.&#10;A) principal-agent&#10;B) debt deflation&#10;C) democratization of credit&#10;D) collateralized debt

Accepted Answer

The answer of The originate-to-distribute business model has a serious...

Question 48

A bank loan to a household or business was not a security because ________.&#10;A) it could not be bought or sold in a financial market&#10;B) it was not a debt instrument&#10;C) there was no market for them&#10;D) they increased the asymmetric information problem

Accepted Answer

The answer of A bank loan to a household or...

Question 49

When housing prices began to decline after their peak in 2006,many subprime borrowers found that their mortgages were &#34;underwater.&#34; This meant that ________.&#10;A) the value of the house fell below the amount of the mortgage&#10;B) the basement flooded since they could not afford to fix the leaky plumbing&#10;C) the roof leaked during a rainstorm&#10;D) the amount that they owed on their mortgage was less than the value of their house

Accepted Answer

The answer of When housing prices began to decline after...

Question 50

The agency problem in the mortgage markets was due to the ________ business model.&#10;A) originate-to-distribute&#10;B) business-as-usual&#10;C) securitization&#10;D) &#34;pass-through&#34;

Accepted Answer

The answer of The agency problem in the mortgage markets...

Question 51

Increased complexity of structured products can ________.&#10;A) destroy information and improve adverse selection problems&#10;B) increase information and worsen adverse selection problems&#10;C) make asymmetric information better in the financial system&#10;D) make asymmetric information worse in the financial system

Accepted Answer

The answer of Increased complexity of structured products can ________.&#10;A)...

Question 52

As housing prices rose,many subprime borrowers were able to ________.&#10;A) default on their mortgage&#10;B) reduce their loan-to-value ratio&#10;C) get piggyback mortgages&#10;D) walk away from their houses

Accepted Answer

The answer of As housing prices rose,many subprime borrowers were...

Question 53

The &#34;democratization of credit&#34; was attributed to ________.&#10;A) the subprime mortgage market&#10;B) the 2000-2001 recession&#10;C) growth of prime mortgages&#10;D) asset-price gaps

Accepted Answer

The answer of The &#34;democratization of credit&#34; was attributed to...

Question 54

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.&#10;A) Collateralized debt obligation (CDO)&#10;B) Adjustable-rate mortgage&#10;C) Negotiable CD&#10;D) Discount bond

Accepted Answer

The answer of A ________ pays out cash flows from...

Question 55

________ is a process of bundling together smaller loans (like mortgages)into standard debt securities.&#10;A) Securitization&#10;B) Origination&#10;C) Debt deflation&#10;D) Distribution

Accepted Answer

The answer of ________ is a process of bundling together...

Question 56

Credit rating agencies were subject to conflicts of interest in the subprime mortgage market because ________.&#10;A) banks were earning large fees by underwriting the mortgage-backed securities&#10;B) they had little incentives to make sure that the mortgage was a good credit risk&#10;C) they had weak incentives to make sure that the holders of the securities would be paid back&#10;D) they were earning fees from rating the mortgage-backed securities and from advising clients on how to structure the securities to get the highest ratings

Accepted Answer

The answer of Credit rating agencies were subject to conflicts...

Question 57

The growth of the subprime mortgage market led to ________.&#10;A) increased demand for houses and helped fuel the boom in housing prices&#10;B) a decline in the housing industry because of higher default risk&#10;C) a decrease in home ownership as investors chose other assets over housing&#10;D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages

Accepted Answer

The answer of The growth of the subprime mortgage market...

Question 58

________ is the development of new,sophisticated financial instruments.&#10;A) Discounting&#10;B) Origination&#10;C) Financial engineering&#10;D) Distribution

Accepted Answer

The answer of ________ is the development of new,sophisticated financial...

Question 59

Agency problems in the subprime mortgage market included all of the following except ________.&#10;A) homeowners could refinance their houses with larger loans when their homes appreciated in value&#10;B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk&#10;C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back&#10;D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest

Accepted Answer

The answer of Agency problems in the subprime mortgage market...

Question 60

The housing boom in the United States was aided by ________.&#10;A) liquidity from China and India&#10;B) higher interest rates&#10;C) tariffs reducing global trade&#10;D) weak balance sheets in the banking industry

Accepted Answer

The answer of The housing boom in the United States...

Question 61

The Irish government helped mitigate the financial crisis by ________.&#10;A) guaranteeing all deposits&#10;B) privatizing the banking system&#10;C) increasing short term borrowing&#10;D) refusing to inject more capital into the failing system

Accepted Answer

The answer of The Irish government helped mitigate the financial...

Question 62

How do increases in interest rates play a role in promoting financial crises?

Accepted Answer

The answer of How do increases in interest rates play...

Question 63

&#34;Plain vanilla&#34; assets are ________.&#10;A) unsecured promissory notes&#10;B) residential mortgages&#10;C) subprime mortgages&#10;D) CDOs

Accepted Answer

The answer of &#34;Plain vanilla&#34; assets are ________.&#10;A) unsecured promissory...

Question 64

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 ________.&#10;A) commercial paper&#10;B) Treasury notes&#10;C) corporate bonds&#10;D) municipal bonds

Accepted Answer

The answer of Like a CDO,a structured investment vehicle pays...

Deck 9: Financial Crises