1. Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.
A. currency
B. stock market
C. banking
D. commodities
2. Stage Three of a financial crisis in an advanced economy features
A. a general increase in inflation.
B. debt deflation.
C. an increase in general price levels.
D. a full-fledged financial crisis.
3. After the Great Depression, the U.S. government introduced a sets of institutional changes aiming to make banking system less fragile and to prevent another financial crises. These institutional changes do NOT include:
A. Deposit Insurance (FDIC)
B. Central banks as the lender of last resort
C. Set a limit on the maximum profits a bank can earn
D. Separation of commercial banking and investment banking (Glass-Steagall Act 1933)
4. Debt deflation refers to
A. an increase in net worth, leading to a relative fall in general debt levels.
B. a decline in general debt levels due to deleveraging.
C. a decline in bond prices as default rates rise.
D. a decline in net worth as price levels fall while debt burden increased.
5. What of the following is the major problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis?
A. Moral Hazard problem: banks take on greater risks
B. Adverse Selection problem: borrowers who are more likely to default seek loans