#1
Which of the following is a common cause of financial crises?
Rapid inflation
ExplanationRapid inflation destabilizes economies and undermines confidence in currency.
#2
Which of the following is NOT a typical feature of a banking crisis?
A sudden increase in lending
ExplanationA sudden increase in lending is more common during stable economic periods and is not indicative of a banking crisis.
#3
Which of the following is a characteristic of a debt crisis?
Inability to service existing debt obligations
ExplanationDebt crises occur when entities are unable to meet their debt obligations, leading to default or restructuring.
#4
What does the term 'moral hazard' refer to in the context of financial crises?
The tendency for individuals to take greater risks when they believe they are protected from the consequences
ExplanationMoral hazard arises when individuals or institutions take risks knowing they won't bear the full consequences, often leading to excessive risk-taking.
#5
Which of the following is a characteristic of a currency crisis?
Sharp decline in the value of a country's currency
ExplanationA currency crisis is marked by a rapid and significant devaluation of a country's currency, causing economic instability.
#6
What is the role of asymmetric information in financial crises?
It can lead to adverse selection and moral hazard problems
ExplanationAsymmetric information, where one party has more or better information than others, can lead to market inefficiencies such as adverse selection and moral hazard.
#7
Which of the following is a characteristic of a systemic financial crisis?
Affects the entire financial system of a country or region
ExplanationA systemic financial crisis impacts not just isolated sectors but the entire financial system of a country or region, causing widespread economic disruption.
#8
What is the 'Greenspan Put' in the context of financial markets?
An implicit guarantee by the Federal Reserve to intervene in markets to prevent significant losses
ExplanationThe 'Greenspan Put' refers to the perceived willingness of the Federal Reserve to support financial markets by intervening to prevent substantial downturns.
#9
Which of the following is NOT considered a systemic risk factor in financial markets?
Market concentration risk
ExplanationMarket concentration risk, while significant, is not inherently systemic as it affects specific sectors rather than the entire financial system.
#10
What role do 'credit booms' often play in financial crises?
They lead to unsustainable increases in debt levels
ExplanationCredit booms fuel excessive borrowing, often resulting in unsustainable debt levels that trigger financial instability.
#11
In the context of financial crises, what does the 'too big to fail' concept refer to?
The belief that certain financial institutions are so important to the economy that they must be supported by the government if they face collapse
ExplanationThe 'too big to fail' concept suggests that certain institutions are indispensable to the economy and thus must be rescued to prevent systemic collapse.
#12
What is the 'Lender of Last Resort' function of central banks during financial crises?
To provide loans to banks facing liquidity problems
ExplanationCentral banks act as lenders of last resort during financial crises, providing emergency liquidity to banks to prevent systemic collapse.
#13
Which of the following is a measure to prevent financial crises?
Strong regulatory oversight and supervision
ExplanationStrong regulatory oversight and supervision help to identify and mitigate risks, preventing excessive speculation and instability.
#14
What role does financial innovation often play in financial crises?
It can create complex products with hidden risks
ExplanationFinancial innovation, while beneficial in some cases, can also lead to the creation of complex products with hidden risks, contributing to financial instability.
#15
Which of the following is a key characteristic of a speculative bubble?
Sharp increase in asset prices followed by a rapid decrease
ExplanationSpeculative bubbles involve rapid and unsustainable increases in asset prices, often followed by a sudden and significant decline as the bubble bursts.