Tutorial Questions #9
ECON7200
1. What is a credit spread? Why do credit spreads rise significantly during a financial
crisis?
2. If reserve requirements were eliminated in the future, as some economists advocate, what
effects would this have on the size of money market mutual funds?
3. How does the concept of asymmetric information help to define a financial crisis?
4. How can a decline in real estate prices cause deleveraging and a decline in lending?
5. Why did new technology make it harder to enforce limitations on bank branching?
6. How does a deterioration in balance sheets of financial institutions and the simultaneous
failures of these institutions cause a decline in economic activity?
7. How can financial innovation lead to financial crises?
8. Identify two similarities and two differences between the Great Depression and the
Global Financial Crisis of 2007-2009.
MCQs
1. ________ are asymmetric information problems that act as a barrier to efficient allocation
of capital.
A) Asset prices
B) Credit imbalances
C) Financial frictions
D) Financial derivatives
2. When asset prices rise above their fundamental economic values, a(n) ________ occurs.
A) asset-price bubble
B) liability war
C) decline in lending
D) decrease in moral hazard
3. ________ is a process of bundling together smaller loans (like mortgages) into standard
debt securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
4. Which investment bank filed for bankruptcy on September 15, 2008 making it the largest
bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
5. If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220
million of mortgage-backed securities as collateral, the "haircut" is
A) 5%.
B) 10%.
C) 20%.
D) 50%.
6. The government institution that has responsibility for the amount of money and credit
supplied in the economy as a whole is the
A) central bank.
B) commercial bank.
C) bank of settlement.
D) monetary fund.
7. ________ is the process of researching and developing profitable new products and
services by financial institutions.
A) Financial engineering
B) Financial manipulation
C) Customer manipulation
D) Customer engineering
8. Rising interest-rate risk
A) increased the cost of financial innovation.
B) increased the demand for financial innovation.
C) reduced the cost of financial innovation.
D) reduced the demand for financial innovation.
9. A major disruption in financial markets characterized by sharp declines in asset prices and
firm failures is called a
A) financial crisis.
B) fiscal imbalance.
C) free-rider problem.
D) "lemons" problem.
10. If uncertainty about banks' health causes depositors to begin to withdraw their funds from
banks, the country experiences a(n)
A) banking crisis.
B) financial recovery.
C) reduction of the adverse selection and moral hazard problems.
D) increase in information available to investors.
