Question : 9.2   Dynamics of Past U.S. Financial Crises 1) When financial institutions : 1373706

9.2   Dynamics of Past U.S. Financial Crises

1) 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.

2) 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.

3) 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.

4) 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

5) Many 19th century U.S. financial crises were started by

A) spikes in interest rates.

B) financial innovation.

C) onerous financial regulations.

D) a strong improvement in banks’ balance sheets.

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

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.

8) 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.

9) 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.

10) A possible sequence for the three stages of a financial crisis in the U.S. 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

11) 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

12) Typically, the economy recovers fairly quickly from a recession.  Why did this not happen in the United States during the Great Depression?