Chapter 9 Practice Quiz1. 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 calleda. deleveraging.b. releveraging.c. deflation.d. capitulation.2. Most U.S. financial crises have started during periods of _________ either after the start of a recession or a stock market crash.a. high financial regulationb. low interest ratesc. high uncertaintyd. low asset prices3. Debt deflation occurs whena. corporations pay back their loans before the scheduled maturity date.b. an economic downturn causes the price level to fall and a deterioration in firms' net worth because ofthe increased burden of indebtedness.c. rising interest rates worsen adverse selection and moral hazard problems.d. lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral.4. ____________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.a. Distributionb. Debt deflationc. OriginationD. Securitization5. Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created aa. severe adverse selection problem.b. decrease in the demand for houses.c. call to deregulate the industry.d. decline in mortgage applications.6. When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant thata. their basement flooded since they could not afford to fix the leaky plumbing.b. the roof leaked during a rainstorm.c. the value of the house fell below the amount owed on the mortgage.d. the amount that they owned on their mortgage was less than the value of their house.7. Factors likely to cause a financial crisis in emerging market countries includea. decreases in foreign interest rates.b. a foreign exchange crisis.c. too strong oversight of the financial industry.d. fiscal imbalances.8. In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currencya. results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged.b. strengthens their balance sheet in terms of the domestic currency.c. means that the firm does not owe as much on their foreign debt.d. results in an increase in the value of the firm's assets.9. Severe fiscal imbalances can directly trigger a currency crisis sincea. investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency.b. the government may stop printing money.c. the currency must surely increase in value.d. the government may have to cut back on spending.10. A serious consequence of a financial crisis isa. financial globalization.b. an increase in asset prices.c. financial engineering.d. a contraction in economic activity.Answers to practice quiz for Chapter 9.1. A2. C3. B4. D5. A6. C7. D8. A9. A10.
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