Financial Markets and Institutions, 8e (Mishkin)
Chapter 25 Financial Crises In Emerging Market Economies
25.1 Multiple Choice
1) Financial crises
A) are major disruptions in financial markets that are characterized by sharp declines in asset
prices and the failures of many financial and nonfinancial firms.
B) occur when adverse selection and moral hazard problems in financial markets become more
significant.
C) frequently lead to sharp contractions in economic activity.
D) are all of the above.
E) are only A and B of the above.
2) Financial crises
A) cause failures of financial intermediaries and leave only securities markets to channel funds
from savers to borrowers.
B) are a recent phenomenon that occur only in developing countries.
C) invariably lead to debt deflation.
D) all of the above.
E) none of the above.
3) In an emerging market economy, a financial crisis generally begins with
A) mismanagement of financial liberalization or innovation.
B) asset pricing booms and busts.
C) an increase in uncertainty caused by failure of financial institutions.
D) all of the above.
4) When asset prices fall following a boom,
A) moral hazard may increase in companies that have lost net worth in the bust.
B) financial institutions may see the assets on their balance sheets deteriorate, leading to
deleveraging.
C) both A and B are correct.
D) none of the above are correct.
5) Stage Two of a financial crisis in an emerging market economy usually involves a ________
crisis.
A) currency
B) stock market
C) banking
D) commodities
6) Stage Three of a financial crisis in an emerging market economy features
A) a general increase in inflation.
B) debt deflation.
C) an increase in general price levels.
D) a full-fledged financial crisis.
7) In Stage Three of a financial crisis in an emerging market economy, the currency mismatch
refers to ________.
A) the mismatch between size of the actual notes and the high price levels need to buy basic
goods
B) the difference in the currency FX markets over time
C) the mismatch between the currency of the stock and bond markets
D) the fact that most debt in emerging market economies is denominated in U.S. dollars
8) In South Korea, the primary force leading to their financial crisis in 1997 was ________.
A) financial liberalization
B) fiscal mismanagement on the part of the government
C) fraud in financial markets
D) all of the above
E) only B and C of the above
9) In Argentina, the primary force leading to their financial crisis in 2001 was ________.
A) fiscal mismanagement on the part of the government
B) financial liberalization
C) fraud in financial markets
D) all of the above
E) only B and C of the above
10) The experience with financial crises in emerging market economies suggests a number of
government policies that can help make financial crises in emerging market countries less likely,
including
A) beefing up prudential regulation and supervision of banks.
B) better bank risk disclosure.
C) limiting the currency mismatch.
D) all of the above.
E) only B and C of the above.
11) The experience with financial crises in emerging market economies suggests a number of
government policies that can help make financial crises in emerging market countries less likely,
including
A) rapid financial liberalization.
B) better bank risk disclosure.
C) limiting the currency mismatch.
D) all of the above.
E) only B and C of the above.
1) Factors that can lead to worsening conditions in financial markets include increasing interest
rates and asset price booms.
2) During a bank panic, many banks fail in a very short time period.
3) For both emerging market economies and advanced economies, Stage Two of a financial
crisis is the same — a banking crisis.
4) A speculative attack on the currency of a country is the focus of Stage Two of a financial
crisis in an emerging market economy.
5) In an emerging market economy, a currency crisis can be triggered by two things: a
deterioration of bank balance sheets and severe fiscal imbalances.
6) In contrast to most advanced economies that typically denominate debt in domestic currency,
emerging market economies denominate many debt contracts in foreign currency.
1) Describe the sequence of events in a financial crisis in an emerging market economy and
explain why they can cause economic activity to decline.
2) Contrast the stages of a financial crisis between an advanced economy and an emerging
market economy.
3) What is the problem with government safety nets, such as deposit insurance, during the
formative stages of a financial crisis?
4) Discuss the difference in Stage Two of a financial crisis between an advanced economy and
an emerging market economy.
5) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)
and Argentina (2001-2002).
6) Why did the financial crisis in Iceland (2008) resemble a crisis in an emerging market
economy as opposed to an advanced market economy?
7) What are some of the steps that emerging market economies can take to avoid a financial
crisis?