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.
B) fiscal imbalance.
C) free-rider problem.
D) "lemons" problem.
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.
B) allows for a more efficient use of funds.
C) increases economic activity.
D) reduces uncertainty in the economy and increases market efficiency.
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.
4) A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.
A) net worth; less
B) net worth; more
C) liability; less
D) liability; more
5) A sharp stock market decline increases moral hazard incentives
A) since borrowing firms have less to lose if their investments fail.
B) because it is immoral to profit from someone's loss.
C) since lenders are more willing to make loans.
D) reducing uncertainty in the economy and increasing market efficiency.
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.
B) that adverse selection and moral hazard problems are reduced.
C) an increase in the real net worth of the borrowing firm.
D) an increase in lending.
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.
B) an increase in a firm's net worth.
C) a decrease in adverse selection and moral hazard.
D) an increase in willingness to lend.
8) Factors that lead to worsening conditions in financial markets include:
A) declining interest rates.
B) unanticipated increases in the price level.
C) the deterioration in banks' balance sheets.
D) increases in bond prices.
9) 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.
10) A bank panic can lead to a severe contraction in economic activity due to
A) a decline in international trade.
B) the losses of bank shareholders.
C) the losses of bank depositors.
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.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; decreasing
D) decreasing; increasing
12) In emerging economies, government fiscal imbalances may cause fears of
A) debt deflation.
B) default on government debt.
C) stock price declines.
D) lower interest rates.
13) How can asymmetric information lead to a bank panic?
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