Which of the following is true of a banking crisis?
A)It leads to individuals and companies withdrawing their deposits from banks.
B)It results in a sharp appreciation in the value of the currency.
C)It happens due to a decline in domestic borrowing.
D)It occurs due to asset price deflation.
E)It results in low government deficits.

Question

Quizplus · Accepted Answer

A banking crisis often leads to a loss of confidence in banks, causing individuals and companies to withdraw their deposits, leading to a liquidity shortage in the banking system.

Answer: D 
 Asset price deflation, such as a decline in real estate or stock prices, can result in a banking crisis as banks may have lent money based on the inflated asset values, leading to loan defaults and potentially bank failures.

Therefore, the correct answers are A and D.

Which of the Following Is True of a Banking Crisis