Shared Flashcard Set

Details

CHAPTER 9
TEST BANK
58
Economics
12/04/2010

Additional Economics Flashcards

 


 

Cards

Term
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
Definition
financial crisis
Term
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
Definition
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently
Term
A serious consequence of a financial crisis is
Definition
a contraction in economic activity
Term
A sharp decline in the stock market means that the _____ of corporations has fallen making lenders _____ willing to lend
Definition
net worth; less
Term
A sharp stock market decline increases moral hazard incentives
Definition
since borrowing firms have lass to lose if their investments fail
Term
An unanticipated decline in the price level increases the burden of debt on borrowing firms but doesn't raise the real value of borrowing firms' assets. The result is
Definition
that net worth in real terms declines
Term
If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
Definition
a decline in a firm's net worth
Term
Factors that lead to worsening conditions in financial markets include:
Definition
the deterioration in bank's balance sheets
Term
In a bank panic, the source of contagion is the
Definition
asymmetric information problem
Term
A bank panic can lead to a severe contraction in economic activity due to
Definition
a decline in lending for productive investment
Term
In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by _____ firms' and households' interest payments, thereby _____ their cash flow
Definition
increasing; decreasing
Term
In emerging economies, government fiscal imbalances may cause fears of
Definition
default on government debt
Term
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
Definition
credit boom
Term
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
Definition
deleveraging
Term
When financial intermediaries deleverage, firms can't fund investment opportunities resulting in
Definition
a contraction of economic activity
Term
When financial intermediaries deleverage, firms can't fund investment opportunities resulting in
Definition
a contraction of economic activity
Term
A credit boom can lead to a(n) _____ such as we saw in the tech stock market in the late 1990s
Definition
asset-price bubble
Term
Many 19th century U.S. financial crises were started by
Definition
spikes in interest rates
Term
Most U.S. financial crises have started during periods of _____ either after the start of a recession or a stock market crash
Definition
high uncertainty
Term
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
Definition
banking crisis
Term
Debt delation occurs when
Definition
an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness
Term
A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called
Definition
debt deflation
Term
A possible sequence for the three stages of a financial crisis in the U.S. might be _____ leads to _____ leads to _____
Definition
asset price declines; banking crises; unanticipated decline in price level
Term
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 severs economic contraction known as The Great Depression
Definition
debt deflation
Term
Financial innovations that emerged after 2000 in the mortgage markets included all of the following except
Definition
adjustable-rate mortgages
Term
_____ is a process of bundling together smaller loans (like mortgages) into standard debt securities
Definition
Securitization
Term
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
Definition
Collateralized debt obligation (CDO)
Term
The growth of the subprime mortgage market led to
Definition
increased demand for houses and helped fuel the boom in housing prices
Term
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
Definition
principal-agent
Term
Mortgage brokers often didn't make a strong effort to evaluate whether the borrower could pay off the loan. This created a
Definition
severe adverse selection problem
Term
Agency problems in the subprime mortgage market included all of the following except
Definition
homeowners could refinance their houses with larger loans when their homes appreciated in value
Term
When housing prices began to declining after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that
Definition
the value of the house fell below the amount of the mortgage
Term
Although the subprime mortgage market problem began in the U.S., the first indication of the seriousness of the crisis began in
Definition
Europe
Term
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
Definition
commercial paper
Term
Which investment bank filed for bankruptcy on 9/15/08 making it the largest bankruptcy filing in U.S. history?
Definition
Lehman Brothers
Term
The largest bank failure in U.S. history was _____ which went into receivership by the FDIC on 9/25/08.
Definition
Washington Mutual
Term
Credit market problems of adverse selection and moral hazard increased as a result of all of the following except
Definition
increase in housing market prices
Term
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
Definition
guaranteed all the deposits of the commercial banks
Term
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?
Definition
Iceland
Term
Financial crises generally develop along two basic paths:
Definition
mismanagement of financial liberalization/globalizations and severe fiscal imbalances
Term
In emerging market countries, the deterioration in bank's balance sheets has more _____ effects on lending and economic activity than in advanced countries
Definition
negative
Term
The mismanagement of financial liberalization in emerging market countries can be understood as a severe _____
Definition
principal/agent problem
Term
Factors likely to cause a financial crisis in emerging market countries include
Definition
fiscal imbalances
Term
The two key factors that trigger speculative attacks on emerging market currencies are
Definition
deterioration in bank balance sheets and severe fiscal imbalances
Term
Severe fiscal imbalances can directly trigger a currency crisis since
Definition
investors fear that the government may not be able to pay back the debt and so being to sell domestic currency
Term
In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency
Definition
results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged
Term
A sharp depreciation of the domestic currency after a currency crisis leads to
Definition
higher inflation
Term
The key factor leading to the financial crises in Mexico and the East Asian countries was
Definition
a deterioration in banks' balance sheets because of increasing loan lossses
Term
Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include
Definition
increased uncertainty from political shocks
Term
Factors that led to worsening financial market conditions in East Asia in 1997-1998 include
Definition
weak supervision by bank regulators
Term
Factors that led to worsening conditions in Mexico's '94-'95 financial markets, but didn't lead to worsening financial market conditions in East Asia in '97-'98 include
Definition
rise in interest rates abroad
Term
Argentina's financial crisis was due to
Definition
fiscal imbalances
Term
A feature of debt markets in emerging-market countries is that debt contracts are typically
Definition
very short term
Term
The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as
Definition
increased crime
Term
Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were
Definition
nearly 50% of GDP
Term
The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by
Definition
allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions
Term
At the times 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 _____.
Definition
were not; could borrow abroad
Term
At the time of the South Korean financial crisis, the merchant banks were
Definition
almost virtually unregulated