Question

1. Consequences of a banking crisis include

(a) A reduction in bank lending adversely affects economic activities especially in emerging economies that are over-reliant on bank credits.

(b) Negative spill-over effects on other countries’ banking systems.

(c) Use of public funds (for recapitalisation) involves opportunity costs and creates a moral hazard problem.

(d) Heightened adverse selection problem that would lead to inefficient resource allocation.

(e) All of the above

2. Which of the following is NOT true of the banking crisis in emerging market countries?

(a) Dismantling capital controls at the stage of liberalization is usually associated with capital outflows which can drain the liquidity in the domestic financial markets unless effective sterilization measures are in place.

(b) Effectiveness of sterilization depends on the depth of the government debt market which is lacking in most of the emerging markets.

(c) Due to financial integration, a banking crisis in one country may spill over to other countries in the same region.

(d) Through market deepening, the adverse effects of volatility spillovers can be reduced.

(e) (a) and (c) of the above

Answer 1

Question-1. Consequences of a banking crisis include:

Answer-The correct answer is Option a,that is

A reduction in bank lending adversely affects economic activities especially in emerging economies that are over-reliant on bank credits.

As because a banking crisis refers to a conditional where banks are in solvency problems and their assets turn bad and non performing leading to a crisis.

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