Chapter 10 Banking and the Management of Financial Institutions
Chapter 9 Financial Crises and the Subprime Meltdown
9.1 Factors Causing Financial Crises
1) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
A) financial crisis.
2) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
3) A serious consequence of a financial crisis is
A) a contraction in economic activity.
4) A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.
A) net worth; less
5) A sharp stock market decline increases moral hazard incentives
A) since borrowing firms have less to lose if their investments fail.
6) 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
A) that net worth in real terms declines.
7) If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
A) a decline in a firm's net worth.
8) Factors that lead to worsening conditions in financial markets include:
C) the deterioration in banks' balance sheets.
9) In a bank panic, the source of contagion is the
D) asymmetric information problem.
10) A bank panic can lead to a severe contraction in economic activity due to
D) a decline in lending for productive investment.
11) In addition to having 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.
B) increasing; decreasing
12) In emerging economies, government fiscal imbalances may cause fears of
B) default on government debt.
9.1 Factors Causing Financial Crises
1) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
A) financial crisis.
2) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
3) A serious consequence of a financial crisis is
A) a contraction in economic activity.
4) A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.
A) net worth; less
5) A sharp stock market decline increases moral hazard incentives
A) since borrowing firms have less to lose if their investments fail.
6) 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
A) that net worth in real terms declines.
7) If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
A) a decline in a firm's net worth.
8) Factors that lead to worsening conditions in financial markets include:
C) the deterioration in banks' balance sheets.
9) In a bank panic, the source of contagion is the
D) asymmetric information problem.
10) A bank panic can lead to a severe contraction in economic activity due to
D) a decline in lending for productive investment.
11) In addition to having 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.
B) increasing; decreasing
12) In emerging economies, government fiscal imbalances may cause fears of
B) default on government debt.