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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. In emerging market countries, the deterioration in bankʹs balance sheets has more ________ effects on lending and economic activity than in advanced countries.
2. Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?
3. Many 19th century U.S. financial crises were started by
4. If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
5. 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
6. ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.
7. A feature of debt markets in emerging-market countries is that debt contracts are typically________.
8. A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.
9. A bank panic can lead to a severe contraction in economic activity due to
10. Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were
11. 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
12. When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
13. In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firmsʹ and householdsʹ interest payments, thereby ________ their cash flow.
14. 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.
15. When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were ʺunderwater.ʺ This meant that
16. Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in
17. 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.
18. A sharp stock market decline increases moral hazard incentives
19. 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.
20. Factors likely to cause a financial crisis in emerging market countries include
21. Severe fiscal imbalances can directly trigger a currency crisis since
22. The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by
23. In a bank panic, the source of contagion is the
24. A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
25. 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

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