Crisis Dynamics and Responses Flashcards
What happens during a bank run?
Depositors withdraw funds en masse, depleting a bank’s reserves and causing potential insolvency.
How does globalization affect financial crises?
It increases interconnectedness, allowing crises to spread rapidly through trade and financial linkages.
What are the economic effects of a financial crisis?
Reduced credit availability, slower growth, higher unemployment, and potential recessions.
How can deregulation contribute to financial crises?
It can lead to excessive risk-taking, inadequate oversight, and speculative behavior.
What is an asset bubble?
An asset bubble occurs when the price of an asset rises far beyond its intrinsic value due to speculative demand.
What role do derivatives play in financial crises?
Derivatives can amplify risks by creating complex interdependencies that exacerbate instability.
Explain the relationship between financial crises and economic recessions.
Financial crises often cause recessions by disrupting credit markets, reducing consumer spending, and slowing economic activity.
How does monetary policy influence financial crises?
Mismanagement of interest rates can fuel asset bubbles or prolong economic stagnation.
What is the contagion effect, and why is it significant?
The contagion effect is the spread of financial instability across borders or institutions, magnifying the crisis.
How can sovereign defaults impact global markets?
They can trigger credit downgrades, capital flight, and economic contagion, affecting other economies.
What is the role of bailouts during financial crises?
Bailouts provide financial support to prevent systemic collapse but raise concerns over fairness and moral hazard.
How did the Dodd-Frank Act address financial crises?
It strengthened financial regulations and oversight to prevent excessive risk-taking and future crises.
Why is the service sector often overlooked in financial crisis models?
Many models focus on manufacturing and agriculture, underestimating the growing economic role of services.
What is the role of international organizations in financial crises?
Organizations like the IMF provide emergency loans and technical assistance to stabilize economies.
How can trade imbalances contribute to financial crises?
Persistent trade deficits can lead to unsustainable debt and currency instability.
Why is urban unemployment a concern during financial crises?
Urban unemployment can lead to social unrest and a slowdown in industrial production.
What is a sovereign wealth fund’s role during financial crises?
It can provide a financial buffer by stabilizing economies through strategic investments.
How did financial innovation contribute to the 2008 crisis?
Complex instruments like mortgage-backed securities obscured risk, leading to widespread defaults.
What is the impact of political instability on financial crises?
Political instability deters investment and undermines economic policies, worsening financial instability.
How can financial literacy help mitigate the effects of a crisis?
By enabling individuals and businesses to make informed financial decisions, reducing panic and poor risk management.
What role do fiscal stimulus packages play in crisis recovery?
They aim to boost demand by increasing government spending and cutting taxes, stimulating economic activity.
What is a “credit default swap” (CDS), and how can it worsen crises?
A CDS is a financial derivative that insures against credit risk; excessive use can amplify losses during defaults.
How does poor corporate governance contribute to financial crises?
Weak oversight can lead to risky decision-making, fraud, and failure to manage systemic risks.
What is a fiscal deficit, and how can it affect financial stability?
A fiscal deficit occurs when government expenditures exceed revenues, potentially leading to debt crises.
How does investor panic worsen financial crises?
Panic can lead to mass sell-offs, driving down asset prices and reducing market confidence.
What is a financial contagion?
The spread of economic or financial instability from one institution or country to another.
How can inadequate risk assessment lead to financial crises?
Poor risk assessment results in excessive lending or investment in high-risk assets, increasing vulnerability.
What is the Volcker Rule?
A regulation limiting banks from engaging in proprietary trading to reduce systemic risk.
How can financial technology (FinTech) help mitigate future crises?
FinTech can improve risk assessment, enhance transparency, and increase access to credit through innovative solutions.
