FIN 218 Ch. 8

Financial crises

A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.

B) occur when adverse selection and moral hazard problems in financial markets become more significant.

C) frequently lead to sharp contractions in economic activity.

D) are all of the above.

E) are only A and B of the above.

D) All of the above

In an advanced economy, a financial crisis can begin in several ways, including

A) mismanagement of financial liberalization or innovation.

B) asset pricing booms and busts.

C) an increase in uncertainty caused by the failure of financial institutions.

D) all of the above.

D) All of the above

What is a credit boom?

A) An explosion in a credit cycle, which can increase or decrease lending in the short run

B) Essentially a lending spree on the part of banks and other financial institutions

C) When credit card receivables rise due to low initial interest rates

D) The signal of the end of a credit spree, with credit contracting rapidly

B) Essentially a lending spree on the part of banks and other financial institutions

Debt deflation refers to

A) an increase in net worth, leading to a relative fall in general debt levels.

B) a decline in general debt levels due to deleveraging.

C) a decline in bond prices as default rates rise.

D) a decline in net worth as price levels fall while the debt burden remains unchanged.

D) A decline in net worth as price levels fall while the debt burden remains unchanged.

Most financial crises in the United States have begun with

A) a steep stock market decline.

B) an increase in uncertainty resulting from the failure of a major firm.

C) a steep decline in interest rates.

D) all of the above.

E) only A and B of the above.

E) Only A and B of the above.

What is a collateralized debt obligation?

A) A tranche of an SPV that has been setup based on default risk

B) An agreement to exchange interest payments when one party defaults

C) A type of insurance against defaults

D) A contract between credit rating agencies

A) A tranche of an SPV that has been setup based on default risk

Which of the following led to the U.S. financial crisis of 2007-2009?

A) Financial innovation in mortgage markets

B) Agency problems in mortgage markets

C) An increase in moral hazard at credit rating agencies

D) All of the above

E) only A and B of the above

D) All of the above

Leading up to the 2007-2009 Financial Crisis, the ________ process, along with computer technology, enabled the bundling of smaller loans (like mortgages) into standard debt securities.

A) liberalization

B) securitization

C) easing

D) investment banking

B) Securitization

When we refer to the shadow banking system, what are we talking about?

A) Hedge funds, investment banks, and other nonbank financial firms that supply liquidity

B) The "underground" banking system used for illegal activities

C) The subsidiaries of depository institutions

D) None of the above

A) Hedge funds, investment banks, and other nonbank financial firms that supply liquidity

The impact of the 2007-2009 financial crisis was widespread, including

A) the first major bank failure in the UK in over 100 years.

B) the failure of Bear Stearns, the fifth-largest U.S. investment bank.

C) the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury.

D) all of the above.

E) only B and C of the above.

D) All of the above

The amount of required lender collateral that exceeds the loan amount is known as

A) haircuts.

B) a repurchase agreement.

C) shadow banking.

D) balance sheet fluff.

A) Haircuts

The financial crisis of 2007-2009 led to

A) an increase in the stock market.

B) lower levels of loan default.

C) an increase in employment.

D) a 30% decline in housing prices.

D) A 30% decline in housing prices.

Part of the reason for the Financial Crises of 2007-2009 is attributable to the conflicts of interest of

A) real estate appraisers.

B) credit rating agencies.

C) mortgage originators.

D) all of these

D) All of these