Economics of Money, Banking, and Financial Markets, 11e, Global Edition (Mishkin) Chapter 13 Financial Crises in Emerging Market Economies
13.1 Dynamics of Financial Crises in Emerging Market Economies
1) Financial crises generally develop along two basic paths
A) mismanagement of financial liberalization/globalization and severe fiscal imbalances. B) stock market declines and severe fiscal imbalances.
C) mismanagement of financial liberalization/globalization and stock market declines. D) stock market declines and unanticipated declines in the value of the domestic currency. Answer: A
AACSB: Reflective Thinking
2) In emerging market countries, the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries. A) negative B) positive C) affirming D) advancing Answer: A
AACSB: Reflective Thinking
3) All of the following might create problems from financial liberalization in emerging countries EXCEPT
A) ineffective screening of borrowers. B) limits on risk-taking.
C) lax government supervision of banks. D) lenders failure to monitor borrowers. Answer: B
AACSB: Reflective Thinking
4) The mismanagement of financial liberalization in emerging market countries can be understood as a severe
A) principal/agent problem.
B) asymmetric information problem. C) lemons problem. D) free-rider problem. Answer: A
AACSB: Reflective Thinking
5) Factors likely to cause a financial crisis in emerging market countries include A) severe fiscal imbalances.
B) decreases in foreign interest rates. C) a foreign exchange crisis.
D) too strong oversight of the financial industry. Answer: A
AACSB: Reflective Thinking
6) The two key factors that trigger speculative attacks on emerging market currencies are
A) deterioration in bank balance sheets and severe fiscal imbalances. B) deterioration in bank balance sheets and low interest rates abroad. C) low interest rates abroad and severe fiscal imbalances. D) low interest rates abroad and rising asset prices. Answer: A
AACSB: Reflective Thinking
7) Severe fiscal imbalances can directly trigger a currency crisis since
A) 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 government may have to cut back on spending. D) the currency must surely increase in value. Answer: A
AACSB: Reflective Thinking
8) In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency
A) results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged.
B) results in an increase in the value of the firm's assets.
C) means that the firm does not owe as much on their foreign debt. D) strengthens their balance sheet in terms of the domestic currency. Answer: A
AACSB: Reflective Thinking
9) A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation. B) lower import prices. C) lower interest rates.
D) decrease in the value of foreign currency-denominated liabilities. Answer: A
AACSB: Reflective Thinking
10) The key factor leading to the financial crises in Mexico and the East Asian countries was A) a deterioration in banks' balance sheets because of increasing loan losses. B) severe fiscal imbalances.
C) a sharp increase in the stock market. D) a sharp decline in interest rates. Answer: A
AACSB: Application of Knowledge
11) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include A) failure of the Mexican oil monopoly.
B) the ratification of the North American Free Trade Agreement. C) increased uncertainty from political shocks. D) decline in interest rates. Answer: C
AACSB: Application of Knowledge
12) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) a rise in interest rates abroad.
C) unanticipated increases in the price level. D) increased uncertainty from political shocks. Answer: A
AACSB: Application of Knowledge
13) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad.
B) bankers' lack of expertise in screening and monitoring borrowers.
C) deterioration of banks' balance sheets because of increasing loan losses. D) stock market decline. Answer: A
AACSB: Application of Knowledge
14) Argentina's financial crisis was due to A) poor supervision of the banking system. B) a lending boom prior to the crisis. C) fiscal imbalances.
D) lack of expertise in screening and monitoring borrowers at banking institutions. Answer: C
AACSB: Application of Knowledge
15) A feature of debt markets in emerging-market countries is that debt contracts are typically A) very short term. B) long term.
C) intermediate term. D) perpetual. Answer: A
AACSB: Analytical Thinking
16) The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as A) increased crime.
B) difficulty getting a loan. C) currency devaluations. D) loss of output. Answer: A
AACSB: Reflective Thinking
17) Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were A) nearly 50% of GDP. B) about 10% of GDP. C) almost 90% of GDP. D) nearly 25% of GDP. Answer: A
AACSB: Application of Knowledge
18) The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by
A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions.
B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions.
D) not allowing any foreign borrowing by financial institutions. Answer: A
AACSB: Application of Knowledge
19) At the time 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 ________. A) were not; could borrow abroad B) were not; could not borrow abroad C) were; could borrow abroad D) were; could not borrow abroad Answer: A
AACSB: Application of Knowledge
20) At the time of the South Korean financial crisis, the merchant banks were A) almost virtually unregulated.
B) subject to heavy government regulation.
C) engaged in long-term lending to the corporate sector. D) restricted to long-term foreign borrowing. Answer: A
AACSB: Application of Knowledge
21) What two key factors trigger speculative attacks leading to currency cries in emerging market countries?
Answer: The deterioration in bank balance sheets and severe fiscal imbalances are the key factors. To counter a speculative attack, a country might try to raise interest rates. Raising interest rates, however, would worsen the problem of banks that are already in trouble.
Speculators recognize this and seize the opportunity. When their are severe fiscal imbalances, there is concern that government debt will not be paid back. Funds are pulled out of the country and domestic currency is sold leading to a decline in the value of the domestic currency. Speculators will once again seize the opportunity. AACSB: Reflective Thinking
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