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Money, Banking, and Financial Markets Practice Test: Financial Crises and the Subprime Meltdown
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A financial crisis occurs when assets or financial instruments significantly decrease in value, making it hard for businesses to meet their financial obligations. Financial crises are often caused by a period of economic boom and overextension of credit to borrowers.  The subprime meltdown, or subprime mortgage crisis, was a multinational financial crisis that occurred between 2007 and 2010, and was the main trigger of the global financial crisis of 2008. The crisis began after the housing market collapsed, and many borrowers were unable to pay back their loans. This led to a severe economic... Show more
Money, Banking, and Financial Markets Practice Test: Financial Crises and the Subprime Meltdown
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25 Questions

1. ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.
2. A possible sequence for the three stages of a financial crisis in the U.S. might be ________ leads to ________ leads to ________.
3. If uncertainty about banksʹ health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
4. In emerging market countries, the deterioration in bankʹs balance sheets has more ________ effects on lending and economic activity than in advanced countries.
5. A serious consequence of a financial crisis is
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 firmsʹ assets. The result is
7. The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except
8. Factors that lead to worsening conditions in financial markets include:
9. Factors that led to worsening financial market conditions in East Asia in 1997-1998 include
10. A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
11. At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________.
12. 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
13. Credit market problems of adverse selection and moral hazard increased as a result of all of the following except
14. The two key factors that trigger speculative attacks on emerging market currencies are
15. A sharp stock market decline increases moral hazard incentives
16. A substantial decrease in the aggregate price level that reduces firmsʹ net worth may stall a recovery from a recession. This process is called
17. A sharp depreciation of the domestic currency after a currency crisis leads to
18. Severe fiscal imbalances can directly trigger a currency crisis since
19. Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets include
20. The key factor leading to the financial crises in Mexico and the East Asian countries was
21. When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were ʺunderwater.ʺ This meant that
22. Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in
23. 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?
24. The growth of the subprime mortgage market led to
25. Most U.S. financial crises have started during periods of ________ either after the start of a recession or a stock market crash.

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