FIN 421 - Financial Crises

Homeowners in the bottom 20 percent of the net-worth distribution—the poorest homeowners—had low leverage because banks refused to lend to them.

• True

• False

Answer explanation

Net worth is defined as financial assets + housing assets - any debt.

High debt in combination with the dramatic decline in house prices increased the already large gap between the rich and poor in the United States.

• True

• False

Answer explanation

"The rich stayed rich while the poor got poorer."

From 2006 to 2009, large net-worth-decline counties cut back on consumption by almost 60 percent.

• True

• False

Answer explanation

The financial crisis of 2007-2009 is also called the Great Depression.

• True

• False

Answer explanation

In an advanced economy, a financial crisis can begin in several ways, including

• mismanagement of financial liberalization or innovation which leads to credit boom and bust.

• asset pricing booms and busts.

• an increase in uncertainty caused by failure of financial institutions.

• all of the above.

Answer explanation

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

• currency

• stock market

• banking

• commodities

Answer explanation

Stage Three of a financial crisis in an advanced economy features

• a general increase in inflation.

• debt deflation.

• an increase in general price levels.

• a full-fledged financial crisis.

Answer explanation

When the short-term debt markets seized, so did the availability of credit to the shadow banking system.

• True

• False

Answer explanation

Most financial crises in the United States have begun with

• a steep stock market decline.

• an increase in uncertainty resulting from the failure of a major firm.

• a steep decline in interest rates.

• all of the above.

• only A and B of the above.

A credit spread is the difference between the interest rate on loans to businesses and the interest rate on completely safe assets that are sure to be paid back.

• True

• False

Answer explanation