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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. A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
2. Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets include
3. The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as
4. ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.
5. The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________.
6. In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency
7. A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
8. If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
9. 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.
10. Credit market problems of adverse selection and moral hazard increased as a result of all of the following except
11. Financial crises generally develop along two basic paths:
12. A substantial decrease in the aggregate price level that reduces firmsʹ net worth may stall a recovery from a recession. This process is called
13. Factors that lead to worsening conditions in financial markets include:
14. When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in
15. 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.
16. 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
17. When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were ʺunderwater.ʺ This meant that
18. The key factor leading to the financial crises in Mexico and the East Asian countries was
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. A sharp depreciation of the domestic currency after a currency crisis leads to
21. At the time of the South Korean financial crisis, the merchant banks were
22. 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
23. Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were
24. Severe fiscal imbalances can directly trigger a currency crisis since
25. Factors that led to worsening financial market conditions in East Asia in 1997-1998 include

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