Question 11

This paper focuses on three problems the financial system faces. Which of the following is not one of the problems Mishkin discusses?

	A.	The natural advantages banks have in collecting information.
	B.	Asymmetric information.
	C.	Adverse selection.
	D.	Moral hazard.

Question 12

How does Mishkin define financial instability?

	A.	When shocks to the financial system interfere with information flows so that the financial system can longer do its job of channeling funds to those with investment opportunities.
	B.	When the intermediation of financial funds, management of risks and the arrangement of payments all fail simultaneously.
	C.	Financial instability is when the financial system is resistant to economic shocks.
	D.	When shocks to the financial system produce new information that financial intermediaries cannot process.

Question 13

How does moral hazard occur?

	A.	When there is an incentive to guard against risk.
	B.	When a borrower has incentive to invest in risky investments since the borrower is the main beneficiary but the lender will bear the cost if the investment fails.
	C.	When a borrower has incentive to invest in risky investments since the lender is the main beneficiary but the borrower will bear the cost if the investment fails.
	D.	When there is a lack of risk.

Question 14

Which of the following is a reason that Mishkin lists for Mexico and Asia that made the rapid expansion of lending a problem?

	A.	Government bailouts.
	B.	New opportunities to take on risk.
	C.	Poor risk assessment.
	D.	Notoriously weak financial regulation and supervision.

Question 15

According to Mishkin, how does asymmetric information occur and affect the financial market?

	A.	Borrowers know less about potential investments than do lenders so they borrow more.
	B.	Lenders know less about potential investments than do borrowers so they increase the amounts they are willing to lend.
	C.	Lenders know less about potential investments than do borrowers so they reduce the amounts they are willing to lend.
	D.	Borrowers know less about potential investments than do lenders so they borrow less.

Question 16

According to Mishkin, there are the two key questions facing policymakers. Which of following is one of these questions?

	A.	How to cope with asymmetric information.
	B.	How to reduce the risk of global instability.
	C.	How to deal with depressions like the Great Depression in the US.
	D.	How to prevent moral hazard.

Question 17

Why do emerging markets not face a deterioration of nonfinancial balance sheets due to unanticipated changes in the rate of inflation?

	A.	Exchange rates vary with debt issued in foreign currency.
	B.	Exchange rates are fixed in regards to debt issue in domestic currency.
	C.	Debt contracts are shorter so that inflation tends not to be factor over the shorter time periods.
	D.	Debt contracts are longer so that inflation tends not to be factor over the shorter time periods.

Question 18

What is financial liberalization?

	A.	Financial liberalization is the regulation of domestic financial markets.
	B.	Financial liberalization is liberalization of the capital account.
	C.	Financial liberalization is when nations give banks a say in the restrictions on both interest rates and the type of lending allowed.
	D.	Financial liberalization is when nations lift restrictions on both interest rate ceilings and the type of lending allowed.

Question 19

What events In Asia caused uncertainty in the run up to crisis?

	A.	Businesses leaving Asia for more developed regions of the world.
	B.	General uncertainty in their financial markets.
	C.	Major businesses failing.
	D.	Increases in land development.

Question 20

Mishkin lists 8 facts (conditions) about the nations that faced crisis in the Mexican and Asian crises. Which of the following precipitated crisis?

	A.	Liquidity
	B.	Fiscal deficits
	C.	Deterioration in bank balance sheets
	D.	Inflation