Mishkin 6ce TB Ch27

Economics of Money, Banking, and Financial Markets 6e (Mishkin)
Chapter 27 Web Chapter 1: Financial Crises in Emerging Markets
27.1 The dynamics of financial crises in emerging markets
1) Financial crises in emerging-market economies generally develop along two basic paths:
________.
A) mismanagement of financial liberalization/globalization and severe fiscal imbalances
B) stock market declines and severe fiscal imbalances
C) mismanagement of financial liberalization/globalization and stock market declines
D) stock market declines and unanticipated declines in the value of the domestic currency
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: Web Chapter 1: Financial Crisis in Emerging Markets
2) In emerging market countries, the deterioration in bank's balance sheets has more ________
effects on lending and economic activity than in advanced countries.
A) negative
B) positive
C) affirming
D) advancing
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) The mismanagement of financial liberalization in emerging market countries can be

understood as a severe ________.
A) asymmetric information problem
B) lemons problem
C) principal/agent problem
D) free-rider problem
Answer: C
Diff: 1 Type: MC
Skill: Recall
4) Factors likely to cause a financial crisis in emerging market countries include ________.
A) decreases in foreign interest rates
B) a foreign exchange crisis
C) too strong oversight of the financial industry
D) fiscal imbalances
Answer: D
Diff: 1 Type: MC
Skill: Recall
1
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5) The two key factors that trigger speculative attacks on emerging market currencies are
________.
A) deterioration in bank balance sheets and low interest rates abroad
B) deterioration in bank balance sheets and severe fiscal imbalances
C) low interest rates abroad and severe fiscal imbalances
D) low interest rates abroad and rising asset prices
Answer: B
Diff: 2 Type: MC
Skill: Recall
6) Severe fiscal imbalances can directly trigger a currency crisis since ________.
A) the government may stop printing money
B) the government may have to cut back on spending
C) the currency must surely increase in value
D) investors fear that the government may not be able to pay back the debt and so begin to sell
domestic currency
Answer: D
Diff: 2 Type: MC
Skill: Recall
7) In emerging market countries, many firms have debt denominated in foreign currency like
the dollar or yen. A depreciation of the domestic currency ________.
A) results in an increase in the value of the firm's assets
B) results in increases in the firm's indebtedness in domestic currency terms, even though the
value of their assets remains unchanged
C) means that the firm does not owe as much on their foreign debt
D) strengthens their balance sheet in terms of the domestic currency
Answer: B
Diff: 2 Type: MC
Skill: Recall
8) A sharp depreciation of the domestic currency after a currency crisis leads to ________.
A) lower import prices
B) lower interest rates
C) decrease in the value of foreign currency-denominated liabilities
D) higher inflation
Answer: D
Diff: 1 Type: MC
Skill: Recall
2
9) The key factor leading to the financial crises in Mexico and the East Asian countries was
________.
A) severe fiscal imbalances
B) a deterioration in banks' balance sheets because of increasing loan losses
C) a sharp increase in the stock market
D) a sharp decline in interest rates
Answer: B
Diff: 1 Type: MC
Skill: Recall
10) In recent years, a number of developing and transition countries have experienced financial
crises, the most dramatic of which was the ________.
A) Mexican crisis of 1994-1995
B) Mexican crisis of 1988-1989
C) Argentina crisis of 1995-1996
D) Brazilian crisis of 1996-1997
Answer: A
Diff: 2 Type: MC
Skill: Recall
11) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include
________.
A) failure of the Mexican oil monopoly
B) the ratification of the North American Free Trade Agreement
C) weak supervision by bank regulators
D) decline in interest rates
Answer: C
Diff: 1 Type: MC
Skill: Applied
12) An important factor leading up to the Mexican financial crisis of 1994-1995 was ________.
A) the failure of the Mexican oil monopoly
B) increasing loan losses at Mexican banks
C) the ratification of the North American Free Trade Agreement
D) the failure to ratify the North American Free Trade Agreement
Answer: B
Diff: 1 Type: MC
Skill: Recall
3
13) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets included
________.
A) strong supervision by bank regulators
B) bankers' lack of expertise in screening and monitoring borrowers
C) improvement of banks' balance sheets because of decreasing loan losses
D) decrease in interest rates
Answer: B
Diff: 2 Type: MC
Skill: Recall
14) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets included
________.
A) fall in interest rates abroad
B) a large increase in lending
C) decreases in the price level
D) strong supervision by bank regulators
Answer: B
Diff: 3 Type: MC
Skill: Recall
15) Factors that led to worsening financial market conditions in East Asia in 1997-1998
included ________.
A) weak supervision by bank regulators
B) a rise in interest rates abroad
C) unanticipated increases in the price level
D) a decrease in interest rates
Answer: A
Diff: 2 Type: MC
Skill: Recall
included ________.
A) strong supervision by bank regulators
C) improvement of banks' balance sheets because of decreasing loan losses
D) unanticipated increases in the price level
Answer: B
Diff: 3 Type: MC
Skill: Recall
4
included ________.
A) rise in interest rates abroad
C) unanticipated increases in the price level
D) strong supervision by bank regulators
Answer: B
Diff: 2 Type: MC
Skill: Recall
included ________.
A) bankruptcy of large firms in South Korea and Thailand
B) the ratification of the East Asia Free Trade Agreement
C) bankers' expertise in screening and monitoring borrowers
Answer: A
Diff: 2 Type: MC
Skill: Recall
19) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did
not lead to worsening financial market conditions in East Asia in 1997-1998 included
________.
C) deterioration of banks' balance sheets because of increasing loan losses
Answer: A
Diff: 2 Type: MC
Skill: Recall
20) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include
________.
A) a rise in interest rates abroad
B) unanticipated increases in the price level
C) weak supervision by bank regulators
D) increased uncertainty from political shocks
Answer: C
Diff: 1 Type: MC
Skill: Recall
5
21) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did
not lead to worsening financial market conditions in East Asia in 1997-1998 include ________.
C) deterioration of banks' balance sheets because of increasing loan losses
D) stock market decline
Answer: A
Diff: 1 Type: MC
Skill: Recall
22) Argentina's financial crisis was due to ________.

A) poor supervision of the banking system
B) a lending boom prior to the crisis
C) fiscal imbalances
D) lack of expertise in screening and monitoring borrowers at banking institutions
Answer: C
Diff: 1 Type: MC
Skill: Applied
23) A feature of debt markets in emerging-market countries is that debt contracts are typically
________.
A) very short term
B) long term
C) intermediate term
D) perpetual
Answer: A
Diff: 1 Type: MC
Skill: Recall
24) The economic hardship resulting from a financial crises is severe, however, there are also
social consequences such as ________.
A) increased crime
B) difficulty getting a loan
C) currency devaluations
D) loss of output
Answer: A
Diff: 1 Type: MC
Skill: Recall
6
25) Economic hardship resulting from a financial crises includes ________.
A) increased crime
B) ethnic violence
C) currency appreciation
D) high unemployment
Answer: D
Diff: 2 Type: MC
Skill: Recall
26) What two key factors trigger speculative attacks leading to currency crises in emerging
market countries?
Answer: The deterioration in bank balance sheets and severe fiscal imbalances are the key
factors. To counter a speculative attack, a country might try to raise interest rates. Raising
interest rates, however, would worsen the problem of banks that are already in trouble.
Speculators recognize this and seize the opportunity. When their are severe fiscal imbalances,
there is concern that government debt will not be paid back. Funds are pulled out of the country
and domestic currency is sold leading to a decline in the value of the domestic currency.
Speculators will once again seize the opportunity.
Diff: 3 Type: ES
Skill: Recall
27) What is the relationship between fiscal imbalances in emerging-market economies and
financial crises?
Answer: Fiscal imbalances create fears of default on government debt. Government debt then
falls in price, leading to a weakening of financial institutions' balance sheets. Lending contracts,
and a currency crises may occur if investors pull their money out of the country. Balance sheets
of firms who have foreign currency debt deteriorate. This leads to an increase in adverse
selection and moral hazard problems, a decline in lending, and a contraction of economic
activity.
Diff: 3 Type: ES
Skill: Recall
7
27.2 Preventing emerging market financial crises
1) List four things that emerging market economies can do to prevent financial crises.
Answer: They should increase prudential regulation and supervision of banks, encourage
disclosure and market-based discipline, limit currency mismatch and sequence financial
liberalization.
Diff: 2 Type: ES
Skill: Recall
2) Explain what is meant by prudential regulation.

Answer: This is regulation designed to insure that banks have adequate risk management
policies in place. It will include good risk measurement and monitoring systems, policies to
limit activities that present significant risks, and internal controls to prevent fraud or
unauthorized activities.
Diff: 2 Type: ES
Skill: Recall
3) What is meant by market-based discipline?

Answer: Market-based discipline are the added costs that firms or market participants pay as a
result of their own risk taking activities. As banks engage in higher risk activities, their
depositors will, if they are informed, withdraw deposits unless they are compensated by higher
returns. In this way the market provides discipline.
Diff: 2 Type: ES
Skill: Recall
4) What is a currency mismatch and why does it create risks?

Answer: When non-financial firms or financial firms hold assets denominated in a different
currency than their liabilities they incur the risk that, as a result of an appreciation of the
currency in which their liabilities are denominated, they suffer a loss of net worth. As this
would lead to a worsening of adverse selection problems in credit markets this could precipitate
a financial crisis.
Diff: 2 Type: ES
Skill: Recall
8

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 27 Web Chapter 1: Financial Crises in Emerging Markets

27.1 The dynamics of financial crises in emerging markets

3) The mismanagement of financial liberalization in emerging market countries can be

22) Argentina's financial crisis was due to ________.

2) Explain what is meant by prudential regulation.

3) What is meant by market-based discipline?

4) What is a currency mismatch and why does it create risks?

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