the economics of money, banking, and financial markets

270 $

© 2014 Pearson Canada Inc.$

24 ) 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
Diff: 1 Type: MC Page Ref: 207
Skill: Recall
Objective List: 9.3 Discuss the most recent financial crisis

25. 
    

    Economic hardship resulting from a financial crises includes ____.
    A) increased crime
    B) ethnic violence
    C) currency appreciation
    D) high unemployment
    Answer: D
    Diff: 2 Type: MC Page Ref: 207
    Skill: Recall
    Objective List: 9.3 Discuss the most recent financial crisis

    
    


26. 
    

    What two key factors trigger speculative attacks leading to currency crises 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.
    Diff: 3 Type: SA Page Ref: 202 - 203
    Skill: Recall
    Objective List: 9.3 Discuss the most recent financial crisis

    
    


27. 
    

    What is the relationship between fiscal imbalances in emerging-market economies and
    financial crises?
    Answer: Fiscal imbalances create fears of default on government debt. Government debt then
    falls in price, leading to a weakening of financial institutions' balance sheets. Lending contracts,
    and a currency crises may occur if investors pull their money out of the country. Balance sheets
    of firms who have foreign currency debt deteriorate. This leads to an increase in adverse
    selection and moral hazard problems, a decline in lending, and a contraction of economic
    activity.
    Diff: 3 Type: SA Page Ref: 203
    Skill: Recall
    Objective List: 9.1 Discuss the factors that lead to financial crises