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WorksheetsFinancial Crisis
Total questions: 10
Worksheet time: 7mins
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.
________ are asymmetric information problems that act as a barrier to efficient allocation of capital.
Asset prices
Credit imbalances
Financial frictions
Financial derivatives
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.
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.
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
In a bank panic, the source of contagion is the
free-rider problem.
too-big-to-fail problem.
transactions cost problem.
asymmetric information problem.
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.
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
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.
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
