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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
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.1 Define the term "financial crises"
2) Asymmetric information problems that act as a barrier to efficient allocation of capital are
often described as ________.
A) financial treason
B) financial markets
C) financial frictions
D) financial allocations
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 9.1 Define the term "financial crises"
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9.2 Dynamics of Financial Crises
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5) 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) deflation
B) releveraging
C) capitulation
D) deleveraging
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
6) When financial institutions go on a lending spree and expand their lending at a rapid pace
they are participating in a ________.
A) credit bust
B) credit boom
C) deleveraging
D) market race
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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9) Factors that lead to worsening conditions in financial system include ________.
A) increases in net worth
B) unanticipated increases in the price level
C) unanticipated increases in the value of the domestic currency
D) unanticipated declines in the value of the domestic currency
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
10) Factors that lead to worsening conditions in financial system include ________.
A) declining interest rates
B) unanticipated increases in the price level
C) the deterioration in banks' balance sheets
D) increases in bond prices
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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13) A sharp decline in the stock market means that the ________ of corporations has fallen.
A) net worth
B) interest rates
C) liabilities
D) payrolls
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
16) Factors that lead to worsening conditions in financial system include ________.
A) increases in net worth
B) stock market increases
C) decreases in interest rates
D) stock market declines
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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17) Share prices are a valuation of a corporation's ________.
A) collateral
B) net worth
C) current capital
D) net earnings
Answer: B
Diff: 1 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
18) 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
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
19) A(n) ________ is an increase in prices of assets above their fundamental economic values.
A) decrease in moral hazard
B) asset-price bubble
C) decline in lending
D) liability war
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
20) Most 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
Answer: A
Diff: 1 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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21) The start of a recession or a stock market crash can result in ________.
A) high financial regulation
B) low interest rates
C) low asset prices
D) high uncertainty
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
23) 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
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
24) 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
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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25) If debt contracts are of fairly long maturity, then an unanticipated decline in the aggregate
price level 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
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
26) Factors that lead to worsening conditions in financial system include ________.
A) increases in net worth
B) unanticipated increases in the price level
C) decreases in interest rates
D) unanticipated declines in the price level
Answer: D
Diff: 2 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
27) 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
Answer: A
Diff: 3 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
28) 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
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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29) If the anatomy of a financial crisis is thought of as a sequence of events, which of the
following events would be least likely to be the initiating cause of the financial crisis?
A) Increase in interest rates
B) Bank panic
C) Stock market decline
D) Increase in uncertainty
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
30) If the anatomy of a financial crisis is thought of as a sequence of events, which of the
following events would be least likely to be the initiating cause of the financial crisis?
A) Increase in interest rates
B) Stock market decline
C) Unanticipated decline in price level
D) Increase in uncertainty
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
31) An economic downturn which causes the price level to fall and a deterioration in firms' net
worth because of the increased burden of indebtedness results in ________.
A) asset bubbles
B) rising interest rates
C) debt deflation
D) financial recovery
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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33) 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
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
34) A possible sequence for the three stages of a financial crisis in Canada 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
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
35) 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
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
36) The Irish government helped mitigate the financial crisis by ________.
A) guaranteeing all deposits
B) privatizing the banking system
C) increasing short term borrowing
D) refusing to inject more capital into the failing system
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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37) The government bailout of troubled financial institutions occurred in the U.S. and many
other countries. Which country saw their banking system collapse requiring the government to
take over its three largest banks?
A) Iceland
B) England
C) Germany
D) Belgium
Answer: A
Diff: 1 Type: MC
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
38) Like a CDO, a structured investment vehicle pays off cash flows from pools of assets,
however, rather than long-term debt the structured investment vehicle backs ________.
A) commercial paper
B) Treasury notes
C) corporate bonds
D) municipal bonds
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
39) How do increases in interest rates play a role in promoting financial crises?
Answer: Students should discuss the increase in adverse selection, the decline in lending, the
decline in investment and aggregate economic activity, and the effects on cash flow.
Diff: 2 Type: ES
Skill: Recall
Objective: 9.2 Identify the key features of the three stages of a financial crisis
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42) Typically, the economy recovers fairly quickly from a recession. Why did this not happen
in the United States during the Great Depression?
Answer: The 25 percent decline in the price level from 1930-1933 triggered a debt deflation.
The loss of net worth increased adverse selection and moral hazard problems in the credit
markets and increased and prolonged the economic contraction.
Diff: 2 Type: ES
Skill: Applied
Objective: 9.2 Identify the key features of the three stages of a financial crisis
1) ________ is a process of bundling together smaller loans (like mortgages) into standard debt
securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
2) Financial innovations that emerged after 2000 in the mortgage markets included all of the
following except ________.
A) adjustable-rate mortgages
B) subprime mortgages
C) Alt-A mortgages
D) mortgage-backed securities
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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4) A ________ pays out cash flows from subprime mortgage-backed securities in different
tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there
were losses on the mortgage-backed securities.
A) collateralized debt obligation (CDO)
B) adjustable-rate mortgage
C) negotiable CD
D) discount bond
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
6) The originate-to-distribute business model has a serious ________ problem since the
mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.
A) principal-agent
B) debt deflation
C) democratization of credit
D) collateralized debt
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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8) Mortgage brokers often did not make a strong effort to evaluate whether the borrower could
pay off the loan. This created a ________.
A) severe adverse selection problem
B) decline in mortgage applications
C) call to deregulate the industry
D) decrease in the demand for houses
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
9) The agency problem in the mortgage markets was due to the ________ business model.
A) originate-to-distribute
B) business-as-usual
C) securitization
D) "pass-through"
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
11) The housing boom in the United States was aided by ________.
A) liquidity from China and India
B) higher interest rates
C) tariffs reducing global trade
D) weak balance sheets in the banking industry
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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12) The "democratization of credit" was attributed to ________.
A) the subprime mortgage market
B) the 2000-2001 recession
C) growth of prime mortgages
D) asset-price gaps
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
13) Credit market problems of adverse selection and moral hazard increased as a result of all of
the following except ________.
A) increase in housing market prices
B) increased uncertainty from the failures of financial institutions
C) deterioration in financial institutions' balance sheets
D) decline in the stock market of over 40 percent from its peak
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
15) Agency problems in the subprime mortgage market included all of the following except
________.
A) homeowners could refinance their houses with larger loans when their homes appreciated in
value
B) mortgage originators had little incentives to make sure that the mortgage is a good credit
risk
C) underwriters of mortgage-backed securities had weak incentives to make sure that the
holders of the securities would be paid back
D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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16) Agency problems in the subprime mortgage market included all of the following except
________.
A) homeowners could refinance their houses with larger loans when their homes appreciated in
value
B) mortgage originators had little incentives to make sure that the mortgage is a good credit
risk
C) underwriters of mortgage-backed securities had weak incentives to make sure that the
holders of the securities would be paid back
D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
17) Credit rating agencies were subject to conflicts of interest in the subprime mortgage market
because ________.
A) banks were earning large fees by underwriting the mortgage-backed securities
B) they had little incentives to make sure that the mortgage was a good credit risk
C) they had weak incentives to make sure that the holders of the securities would be paid back
D) they were earning fees from rating the mortgage-backed securities and from advising clients
on how to structure the securities to get the highest ratings
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
19) As housing prices rose, many subprime borrowers were able to ________.
A) default on their mortgage
B) reduce their loan-to-value ratio
C) get piggyback mortgages
D) walk away from their houses
Answer: C
Diff: 2 Type: MC
Skill: Applied
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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20) When housing prices began to decline after their peak in 2006, many subprime borrowers
found that their mortgages were "underwater." This meant that ________.
A) the value of the house fell below the amount of the mortgage
B) the basement flooded since they could not afford to fix the leaky plumbing
C) the roof leaked during a rainstorm
D) the amount that they owed on their mortgage was less than the value of their house
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
21) Between October 2007 and March 2009, asset prices in the stock market fell by ________.
A) over 50 percent
B) 10 percent
C) around 16 percent
D) less than 30 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
22) Although the subprime mortgage market problem began in the United States, the first
indication of the seriousness of the crisis began in ________.
A) Europe
B) Australia
C) China
D) South America
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
23) Fitch and Standard & Poor announced downgrades on ________ of mortgage-backed
securities and CDOs.
A) more than $10 billion
B) more than $100 billion
C) $50 billion
D) more than $10 million
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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24) U.S. firms affected by the financial crisis included ________.
A) Bear Stearns and Merrill Lynch
B) AIG and JP Morgan
C) Manulife and RBC
D) Capital One and BNP Paribas
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
25) Which investment bank filed for bankruptcy on September 15, 2008 making it the largest
bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
Answer: A
Diff: 1 Type: MC
Skill: Applied
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
26) During the 2007-2009 financial crisis in the U.S. the credit spreads peaked at ________ in
December 2008.
A) nearly 6 percent
B) nearly 5 percent
C) nearly 4 percent
D) 3 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
27) By 2012, the debt to GDP ratio for Greece had climbed to ________.
A) 60%
B) 100%
C) 160%
D) 200%
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
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28) What triggered the 2007-2008 financial crises ?
Answer: The crises was triggered by mismanagement of financial innovation in the sub prime
residential mortgage market and the bursting of a bubble in housing prices.
Diff: 1 Type: ES
Skill: Recall
Objective: 9.3 Describe the causes and consequences of the global financial crisis of 2007-2009
2) In Canada, an early symptom of the U.S. subprime mortgage market problem was the
________.
A) financial engineering of the asset-backed commercial paper market
B) freezing of the asset-backed commercial paper market
C) increase of the asset-backed commercial paper market
D) restructuring of the asset-backed commercial paper market
Answer: B
Diff: 3 Type: MC
Skill: Recall
Objective: 9.4 Describe the impact of the 2007-2009 financial crisis on Canada
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3) During the ABCP saga, The Bank of Canada ________.
A) shut down all non-bank sponsored conduits
B) refused to accept ABCPs as collateral for loans to banks
C) provided liquidity as a lender to the market
D) was bailed out by the CDIC
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 9.4 Describe the impact of the 2007-2009 financial crisis on Canada
1) A major shift in the US system of financial regulation in the aftermath to the financial crisis
is ________.
A) an easing of monetary policy
B) a tightening of monetary policy
C) a shift from microprudential supervision to macroprudential supervision
D) a shift from macroprudential supervision to microprudential supervision
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
3) When regulators examine the financial system's risk incurring activities it is engaging in
________ supervision.
A) microprudential
B) macroprudential
C) both microprudential and macroprudential
D) neither microprudential nor macroprudential
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
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4) The recognition that increased availability of credit leading to higher asset prices and
financial buffers at lending institutions and therefore further expansion of credit availability is
referred to as ________.
A) microprudential supervision
B) macroprudential supervision
C) the leverage cycle
D) a liquidity crisis
Answer: C
Diff: 2 Type: MC
Skill: Applied
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
5) When regulators examine the adequacy of the financial system's liquidity it is engaging in
________ supervision.
A) microprudential
B) macroprudential
C) both microprudential and macroprudential
D) neither microprudential nor macroprudential
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
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7) The net stable funding ratio is the ratio of ________ and ideally should be relatively
________.
A) the percentage of long-term to total funding; low
B) the percentage of long-term to total funding; high
C) the percentage of short-term to total funding; low
D) the percentage of short-term to total funding; high
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
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10) The Volcker rule ________.
A) raises the limit on proprietary trading but decreases the allowable holdings of hedge funds
B) raises the limit on proprietary trading and increases the allowable holdings of hedge funds
C) lowers the limit on proprietary trading and decreases the allowable holdings of hedge funds
D) lowers the limit on proprietary trading but increases the allowable holdings of hedge funds
Answer: C
Diff: 3 Type: MC
Skill: Recall
Objective: 9.5 Summarize the changes to financial regulation that occured in response to the
global financial crisis of 2007-2009
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9.6 Too-Big-To-Fail and Future Regulation
3) To reduce the incentives of financial institution managers to engage in excessive risk taking
regulators might require that bonuses be ________.
A) paid immediately
B) paid after several years
C) paid after several years only if the firm remains in good financial health
D) paid in the form of stock options
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 9.6 Identify the gaps in current financial regulation and how those gaps may be
addressed with future regulatory changes
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5) Explain the reasoning behind the recommendation that capital requirements be pro-cyclical.
Answer: When the economy is improving the requirement that financial institutions increase
their capital requirements will curtail their risk taking behaviour and when the economy is
slowing, lower capital requirements will encourage them to take more risk and lend to
businesses and individuals.
Diff: 1 Type: ES
Skill: Applied
Objective: 9.6 Identify the gaps in current financial regulation and how those gaps may be
addressed with future regulatory changes
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