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- 1. Multiple Choice
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
allows for a more efficient use of funds.
increases economic activity.
reduces uncertainty in the economy and increases market efficiency.
- 2. Multiple Choice
________ are asymmetric information problems that act as a barrier to efficient allocation of capital.
Asset prices
Credit imbalances
Financial frictions
Financial derivatives
- 3. Multiple Choice
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
credit boom.
credit bust.
deleveraging.
market race.
- 4. Multiple Choice
When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in
a contraction of economic activity.
an economic boom.
an increased opportunity for growth.
a call for government regulation.
- 5. Multiple Choice
Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution.
low interest rates
high uncertainty
low asset prices
high financial regulation
- 6. Multiple Choice
In a bank panic, the source of contagion is the
free-rider problem.
too-big-to-fail problem.
transactions cost problem.
asymmetric information problem.
- 7. Multiple Choice
A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called
debt deflation.
moral hazard.
insolvency.
illiquidity.
- 8. Multiple Choice
A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.
adjustable-rate mortgage
collateralized debt obligation (CDO)
negotiable CD
discount bond
- 9. Multiple Choice
The growth of the subprime mortgage market led to
increased demand for houses and helped fuel the boom in housing prices.
a decline in the housing industry because of higher default risk.
a decrease in home ownership as investors chose other assets over housing.
decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.
- 10. Multiple Choice
The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency.
currency devaluation
tax cuts
budget surplus
sovereign debt crisis
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