Question 1

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Accepted Answer

A)  Sustainable, but the future burden on your children cannot be offset. 
B)  Sustainable, and the future burden on your children can be offset if you save for them. 
C)  Not sustainable, and the future burden on your children cannot be offset. 
D)  Not sustainable, but the future burden on your children can be offset if you save for them. 
A)  Sustainable, but the future burden on your children cannot be offset. 
B)  Sustainable, and the future burden on your children can be offset if you save for them. 
C)  Not sustainable, and the future burden on your children cannot be offset. 
D)  Not sustainable, but the future burden on your children can be offset if you save for them. B

Question 2

The sub-prime market refers to lending to individuals with poor credit ratings who are classed as high-risk.

Accepted Answer

A) True 
 B)False  True

Question 3

Economists who argue that the government need not balance its budget make all of the following arguments except which one?

Accepted Answer

A)  Budget deficits increase future growth because they transfer wealth from the present generation to future generations. 
B)  As long as the budget deficit is used to finance investment spending rather than current government spending then a budget deficit is quite acceptable. 
C)  Budget deficits will not become an increasing burden as long as they do not grow more quickly than a nation's nominal income. 
D)  Cutting the budget deficit means the tax burden on future generations can be lower; but if the deficit reduction is achieved by reducing spending on public services such as education then it may mean that younger generations have lower productivity, and so lower incomes, than would otherwise have been the case. 
A)  Budget deficits increase future growth because they transfer wealth from the present generation to future generations. 
B)  As long as the budget deficit is used to finance investment spending rather than current government spending then a budget deficit is quite acceptable. 
C)  Budget deficits will not become an increasing burden as long as they do not grow more quickly than a nation's nominal income. 
D)  Cutting the budget deficit means the tax burden on future generations can be lower; but if the deficit reduction is achieved by reducing spending on public services such as education then it may mean that younger generations have lower productivity, and so lower incomes, than would otherwise have been the case. A

Question 4

The higher a government budget deficit is the more likely

Accepted Answer

A)  The risk of default on sovereign debt. 
B)  Economic growth is to stall. 
C)  That interest rates will remain stable over the long run. 
D)  The economic cycle will be predictable over a period. 
E)  It is that tax rates in the country will remain low. 
A)  The risk of default on sovereign debt. 
B)  Economic growth is to stall. 
C)  That interest rates will remain stable over the long run. 
D)  The economic cycle will be predictable over a period. 
E)  It is that tax rates in the country will remain low.

Question 5

Securitization of assets became more popular because it enabled banks to generate additional reserve assets on its books and thus allowed them to expand lending.

Accepted Answer

A) True 
 B)False

Question 6

Explain how it is possible for the government debt to grow.

Accepted Answer

The debt can grow because the economy gr

Question 7

A structural deficit refers to a situation where the deficit is not dependent on movements in the economic cycle but indicate that a government is spending beyond its means.

Accepted Answer

A) True 
 B)False

Question 8

A sovereign debt crises is when:

Accepted Answer

A)  Any government is in debt to over 10% of the GDP. 
B)  National debt falls. 
C)  The inability of a country to pay back its public debt. 
D)  All of the above. 
A)  Any government is in debt to over 10% of the GDP. 
B)  National debt falls. 
C)  The inability of a country to pay back its public debt. 
D)  All of the above.

Question 9

Lending to governments used to be seen as relatively risk-free, but in the wake of the ____________ it became clear that for some governments, this was not the case.

Accepted Answer

A)  creation of the eurozone 
B)  deregulation of the banking sector 
C)  2007-09 global economic crisis 
D)  Brexit vote. 
A)  creation of the eurozone 
B)  deregulation of the banking sector 
C)  2007-09 global economic crisis 
D)  Brexit vote.

Question 10

The size of the output gap depends on which of the following?

Accepted Answer

A)  The ease with which the unemployed can find work. 
B)  The difference between consumption spending and total output. 
C)  How far businesses have built up inventories during an economic slowdown. 
D)  How far an economic downturn has destroyed economic capacity in a country. 
A)  The ease with which the unemployed can find work. 
B)  The difference between consumption spending and total output. 
C)  How far businesses have built up inventories during an economic slowdown. 
D)  How far an economic downturn has destroyed economic capacity in a country.

Question 11

Asset price bubbles occur because:

Accepted Answer

A)  Of a global imbalance in assets. 
B)  The supply of assets falls at a faster rate than the demand thus creating a shortage. 
C)  Expectations of price movements are factored in as a result of the rise in global asset levels. 
D)  Asset traders become more risk averse over time. 
E)  Regulators take insufficient notice of the supply and demand of global assets. 
A)  Of a global imbalance in assets. 
B)  The supply of assets falls at a faster rate than the demand thus creating a shortage. 
C)  Expectations of price movements are factored in as a result of the rise in global asset levels. 
D)  Asset traders become more risk averse over time. 
E)  Regulators take insufficient notice of the supply and demand of global assets.

Question 12

Why did banks take more risks before the 2007-09 global economic crisis?

Accepted Answer

The financial markets were deregulated w

Question 13

A feature of the sovereign debt crisis has been for a number of Eurozone countries to:

Accepted Answer

A)  Put all their debts together. 
B)  Agree to have different interest rates. 
C)  Spend their way out of debt. 
D)  Agree to austerity measures. 
A)  Put all their debts together. 
B)  Agree to have different interest rates. 
C)  Spend their way out of debt. 
D)  Agree to austerity measures.

Question 14

Which of the following is NOT correct?

Accepted Answer

A)  Deficits give people the opportunity to consume at the expense of their children, but deficits do not require them to do so. 
B)  Deficits and surpluses could be used to avoid fluctuations in the tax rate. 
C)  The only times deficits have increased have been during times of war or economic downturns. 
D)  Reducing the budget deficit rather than funding more education spending could, all things considered, make future generations worse off. 
A)  Deficits give people the opportunity to consume at the expense of their children, but deficits do not require them to do so. 
B)  Deficits and surpluses could be used to avoid fluctuations in the tax rate. 
C)  The only times deficits have increased have been during times of war or economic downturns. 
D)  Reducing the budget deficit rather than funding more education spending could, all things considered, make future generations worse off.

Question 15

When a government fails to balance its _______, it has to borrow money by issuing ______ in order to make up the shortfall.

Accepted Answer

A)  bonds, budget 
B)  budget, bonds 
C)  sheet, stocks 
D)  act, paper 
A)  bonds, budget 
B)  budget, bonds 
C)  sheet, stocks 
D)  act, paper

Question 16

During a severe downturn in the economy, a central bank would be most likely to:

Accepted Answer

A)  Increase its base lending rates. 
B)  Cut interest rates and increase liquidity in the markets. 
C)  Instruct markets to cut back lending to reduce inflation. 
D)  Manage its assets so that the exchange rate falls. 
A)  Increase its base lending rates. 
B)  Cut interest rates and increase liquidity in the markets. 
C)  Instruct markets to cut back lending to reduce inflation. 
D)  Manage its assets so that the exchange rate falls.

Question 17

Which of the following reduces the potential burden of an increase in debt on future generations?

Accepted Answer

A)  The growth rate of output is high. 
B)  In response to increased debt, parents save more to leave their children larger bequests. 
C)  some of the current spending benefits future taxpayers. 
D)  All of the above are correct. 
A)  The growth rate of output is high. 
B)  In response to increased debt, parents save more to leave their children larger bequests. 
C)  some of the current spending benefits future taxpayers. 
D)  All of the above are correct.

Question 18

What's the basis for arguing that deficits are likely to lead to lower living standards in the future?

Accepted Answer

A government deficit means that the gove

Question 19

As opposed to the sub-prime market, the prime market is where

Accepted Answer

A)  Individuals are assessed as being a relatively low credit risk for mortgage lending. 
B)  Individuals are assessed as being a relatively high credit risk for mortgage lending. 
C)  Interest rates on mortgages were likely to be high. 
D)  Individuals have a poor credit rating. 
A)  Individuals are assessed as being a relatively low credit risk for mortgage lending. 
B)  Individuals are assessed as being a relatively high credit risk for mortgage lending. 
C)  Interest rates on mortgages were likely to be high. 
D)  Individuals have a poor credit rating.

Question 20

Markets looked to central banks to respond by:

Accepted Answer

A)  Their speed of intervention. 
B)  The degree of innovation shown. 
C)  Co-ordinated action. 
D)  All of the above. 
A)  Their speed of intervention. 
B)  The degree of innovation shown. 
C)  Co-ordinated action. 
D)  All of the above.

Exam 38: The Financial Crisis and Sovereign Debt

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

The sub-prime market refers to lending to individuals with poor credit ratings who are classed as high-risk.

Economists who argue that the government need not balance its budget make all of the following arguments except which one?

The higher a government budget deficit is the more likely

Securitization of assets became more popular because it enabled banks to generate additional reserve assets on its books and thus allowed them to expand lending.

Explain how it is possible for the government debt to grow.

A structural deficit refers to a situation where the deficit is not dependent on movements in the economic cycle but indicate that a government is spending beyond its means.

A sovereign debt crises is when:

Lending to governments used to be seen as relatively risk-free, but in the wake of the ____________ it became clear that for some governments, this was not the case.

The size of the output gap depends on which of the following?

Asset price bubbles occur because:

Why did banks take more risks before the 2007-09 global economic crisis?

A feature of the sovereign debt crisis has been for a number of Eurozone countries to:

Which of the following is NOT correct?

When a government fails to balance its _______, it has to borrow money by issuing ______ in order to make up the shortfall.

During a severe downturn in the economy, a central bank would be most likely to:

Which of the following reduces the potential burden of an increase in debt on future generations?

What's the basis for arguing that deficits are likely to lead to lower living standards in the future?

As opposed to the sub-prime market, the prime market is where

Markets looked to central banks to respond by:

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

Filters

When a government fails to balance its _, it has to borrow money by issuing in order to make up the shortfall.