Economics of Money Banking and

Financial Markets 10th Edition by

Mishkin ISBN 0132770245
9780132770248
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Economics of Money, Banking, and Fin. Markets, 10e (Mishkin)

Chapter 9 Financial Crises

9.1 What is a Financial Crisis?

1) A major disruption in financial markets characterized by sharp declines in asset prices and
firm failures is called a
A) financial crisis.
B) fiscal imbalance.
C) free-rider problem.
D) "lemons" problem.
Answer: A
Ques Status: Previous Edition

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.
1
Copyright © 2013 Pearson Education, Inc.
B) allows for a more efficient use of funds.
C) increases economic activity.
D) reduces uncertainty in the economy and increases market efficiency.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

3) A serious consequence of a financial crisis is

A) a contraction in economic activity.
B) an increase in asset prices.
C) financial engineering.
D) financial globalization.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

2
Copyright © 2013 Pearson Education, Inc.
9.2 Dynamics of Financial Crises in Advanced Economies

1) Financial crises in advanced economies might start from a

A) debt deflation.
B) currency crisis.
C) mismanagement of financial innovations.
D) currency mismatch.
Answer: C
Ques Status: New
AACSB: Reflective thinking skills

2) When financial institutions go on a lending spree and expand their lending at a rapid pace they
are participating in a
A) credit boom.
B) credit bust.
C) deleveraging.
D) market race.
Answer: A
Ques Status: Previous Edition

3) 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
A) deleveraging.
B) releveraging.
C) capitulation.
D) deflation.
Answer: A
Ques Status: Previous Edition

4) When financial intermediaries deleverage, firms cannot fund investment opportunities

resulting in
A) a contraction of economic activity.
B) an economic boom.
C) an increased opportunity for growth.
D) a call for government regulation.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

5) A credit boom can lead to a(n) ________ such as we saw in the tech stock market in the late
1990s.
A) asset-price bubble
B) liability war
C) decline in lending
D) decrease in moral hazard
Answer: A
Ques Status: Previous Edition
3
Copyright © 2013 Pearson Education, Inc.
6) Most U.S. financial crises have started during periods of ________ either after the start of a
recession or a stock market crash.
A) high uncertainty
B) low interest rates
C) low asset prices
D) high financial regulation
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

7) If uncertainty about banks' health causes depositors to begin to withdraw their funds from
banks, the country experiences a(n)
A) banking crisis.
B) financial recovery.
C) reduction of the adverse selection and moral hazard problems.
D) increase in information available to investors.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

8) In a bank panic, the source of contagion is the

A) free-rider problem.
B) too-big-to-fail problem.
C) transactions cost problem.
D) asymmetric information problem.
Answer: D
Ques Status: Previous Edition
AACSB: Reflective thinking skills

9) Debt deflation occurs when

A) an economic downturn causes the price level to fall and a deterioration in firms' net worth
because of the increased burden of indebtedness.
B) rising interest rates worsen adverse selection and moral hazard problems.
C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the
value of collateral.
D) corporations pay back their loans before the scheduled maturity date.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

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Copyright © 2013 Pearson Education, Inc.
10) A substantial decrease in the aggregate price level that reduces firms' net worth may stall a
recovery from a recession. This process is called
A) debt deflation.
B) moral hazard.
C) insolvency.
D) illiquidity.
Answer: A
Ques Status: Previous Edition

11) A possible sequence for the three stages of a financial crisis in an advanced economy might
be ________ leads to ________ leads to ________.
A) asset price declines; banking crises; unanticipated decline in price level
B) unanticipated decline in price level; banking crises; increase in interest rates
C) banking crises; increase in interest rates; unanticipated decline in price level
D) banking crises; increase in uncertainty; increase in interest rates
Answer: A
Ques Status: Revised
AACSB: Reflective thinking skills

12) 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
Answer: A
Ques Status: Previous Edition
AACSB: Reflective thinking skills

13) ________ is a process of bundling together smaller loans (like mortgages) into standard debt
securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
Answer: A
Ques Status: Previous Edition

5
Copyright © 2013 Pearson Education, Inc.
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