The first three elements of a financial crisis are correctly represented as taking place in the following order:
A)large decline in some asset prices → insolvencies at financial institutions → decline in confidence in financial institutions
B)insolvencies at financial institutions → decline in confidence in financial institutions → large decline in some asset prices
C)insolvencies at financial institutions → economic downturn → credit crunch
D)insolvencies at financial institutions → credit crunch → economic downturn

Question

Quizplus · Accepted Answer

A large decline in some asset prices can lead to insolvencies at financial institutions, as they may have invested heavily in those assets. This, in turn, can lead to a decline in confidence in financial institutions as customers become concerned about their ability to repay deposits or honor other obligations.

The First Three Elements of a Financial Crisis Are Correctly