Question 1

In response to the crisis, the U.S. policymakers implemented:

Accepted Answer

A)  only expansionary monetary policy. 
B)  expansionary fiscal policy and contractionary monetary policy. 
C)  expansionary fiscal policy and expansionary monetary policy. 
D)  contractionary fiscal policy and expansionary monetary policy. 
E)  contractionary fiscal policy and contractionary monetary policy. 
A)  only expansionary monetary policy. 
B)  expansionary fiscal policy and contractionary monetary policy. 
C)  expansionary fiscal policy and expansionary monetary policy. 
D)  contractionary fiscal policy and expansionary monetary policy. 
E)  contractionary fiscal policy and contractionary monetary policy. C

Question 2

What are the two channels in which the effects of the financial crisis was transmitted to the macro economy in the U.S.?

Accepted Answer

First, there was a large increase in interest rates at which consumers and firms could borrow. The interest rate charged to borrowers became very high (in some cases borrowers were completely shut out of borrowing) relative to the interest rate controlled by monetary policy. Second, the effects of the financial crisis had an adverse impact on consumer and firm confidence.

Question 3

Which of the following is called an unconventional monetary policy measure?

Accepted Answer

A)  Asset easing. 
B)  Quantitative easing. 
C)  Financial easing. 
D)  Qualitative easing. 
E)  Exchange easing. 
A)  Asset easing. 
B)  Quantitative easing. 
C)  Financial easing. 
D)  Qualitative easing. 
E)  Exchange easing. B

Question 4

The crisis pushed up borrowing costs, lowered stock prices, and sapped consumer and firm confidence. What effect do these have on the IS curve?

Accepted Answer

A)  There is no effect on the IS curve. 
B)  The IS curve shifts to the right. 
C)  The IS curve becomes horizontal. 
D)  The IS curve becomes vertical. 
E)  The IS curve shifts to the left. 
A)  There is no effect on the IS curve. 
B)  The IS curve shifts to the right. 
C)  The IS curve becomes horizontal. 
D)  The IS curve becomes vertical. 
E)  The IS curve shifts to the left.

Question 5

An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

Accepted Answer

A)  Output will decrease. 
B)  The money supply will not change. 
C)  The interest rate will increase. 
D)  The interest rate will not change. 
E)  Output will increase. 
A)  Output will decrease. 
B)  The money supply will not change. 
C)  The interest rate will increase. 
D)  The interest rate will not change. 
E)  Output will increase.

Question 6

An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

Accepted Answer

A)  The interest rate will not change. 
B)  Output will decrease. 
C)  The interest rate will decrease. 
D)  Output will increase. 
E)  The money supply will not change. 
A)  The interest rate will not change. 
B)  Output will decrease. 
C)  The interest rate will decrease. 
D)  Output will increase. 
E)  The money supply will not change.

Question 7

Consider the following balance sheet situation of ABC bank: its total assets consist of loans of $50 and bonds of $350; and its total liabilities consist of deposits of $400 and debt of $100. What is the capital of ABC bank?

Accepted Answer

A)  $50. 
B)  - $100. 
C)  $0. 
D)  $100. 
E)  - $50. 
A)  $50. 
B)  - $100. 
C)  $0. 
D)  $100. 
E)  - $50.

Question 8

Consider the following balance sheet situation of ABC bank: its total assets consist of loans of $150 and bonds of $350; and its total liabilities consist of deposits of $300 and debt of $100. What is the capital of ABC bank?

Accepted Answer

A)  $100. 
B)  $25. 
C)  $50. 
D)  $75. 
E)  $0. 
A)  $100. 
B)  $25. 
C)  $50. 
D)  $75. 
E)  $0.

Question 9

When the economy is in a liquidity trap with a zero interest rate:

Accepted Answer

A)  the central bank is unable to lower interest rates in response to falling prices. 
B)  the central bank is unable to raise interest rates in response to rising prices. 
C)  the central bank abandons monetary policy altogether. 
D)  the central bank is unable to raise interest rates in response to falling prices. 
E)  the central bank is unable to lower interest rates in response to rising prices. 
A)  the central bank is unable to lower interest rates in response to falling prices. 
B)  the central bank is unable to raise interest rates in response to rising prices. 
C)  the central bank abandons monetary policy altogether. 
D)  the central bank is unable to raise interest rates in response to falling prices. 
E)  the central bank is unable to lower interest rates in response to rising prices.

Question 10

What are securitised bonds?

Accepted Answer

A)  They appear on the asset side of the bank balance sheet. 
B)  These are complex, financially engineered instruments. 
C)  These bonds are given AAA credit rating. 
D)  Both A and B. 
E)  Both B and C. 
A)  They appear on the asset side of the bank balance sheet. 
B)  These are complex, financially engineered instruments. 
C)  These bonds are given AAA credit rating. 
D)  Both A and B. 
E)  Both B and C.

Question 11

The effectiveness of expansionary monetary policy is limited when which of the following occurs?

Accepted Answer

A)  Interest rate trap. 
B)  Credit trap. 
C)  Liquidity trap. 
D)  Output trap. 
E)  Financial trap. 
A)  Interest rate trap. 
B)  Credit trap. 
C)  Liquidity trap. 
D)  Output trap. 
E)  Financial trap.

Question 12

The Nikkei, a Japanese stock price index, reached its peak in which of the following years?

Accepted Answer

A)  1989. 
B)  1995. 
C)  1992. 
D)  1985. 
E)  1990. 
A)  1989. 
B)  1995. 
C)  1992. 
D)  1985. 
E)  1990.

Question 13

What is bank capital and its function?

Accepted Answer

In a (stylised) bank balance sheet, the

Question 14

A primary function of banks is to:

Accepted Answer

A)  expand the creation of money. 
B)  spread the risks from investments to a wide range of savers. 
C)  match saving flows with real investment flows in an economy. 
D)  All of the above. 
E)  None of the above. 
A)  expand the creation of money. 
B)  spread the risks from investments to a wide range of savers. 
C)  match saving flows with real investment flows in an economy. 
D)  All of the above. 
E)  None of the above.

Question 15

To what extent have monetary policy and fiscal policy been able to limit the severity of the Japanese Slump? Explain.

Accepted Answer

The response of monetary policy was like

Question 16

Which of the following allows the bank to raise the level of capital during a financial crisis for certainty?

Accepted Answer

A)  Borrow funds from other financial institutions. 
B)  Sell the remaining assets at fire sale prices. 
C)  Raise more funds by issuing new shares on the stockmarket. 
D)  All of the above. 
E)  None of the above. 
A)  Borrow funds from other financial institutions. 
B)  Sell the remaining assets at fire sale prices. 
C)  Raise more funds by issuing new shares on the stockmarket. 
D)  All of the above. 
E)  None of the above.

Question 17

The process of banks borrowing from other banks and other investors to finance their asset purchases is known as:

Accepted Answer

A)  credit funding. 
B)  market funding. 
C)  retailing funding. 
D)  debt funding. 
E)  wholesale funding. 
A)  credit funding. 
B)  market funding. 
C)  retailing funding. 
D)  debt funding. 
E)  wholesale funding.

Question 18

Which of the following is the aggregate supply explanation of the slow U.S. recovery?

Accepted Answer

A)  The banking crisis has increased the natural level of employment. 
B)  The banking crisis has decreased the natural rate of unemployment. 
C)  The banking crisis has decreased the natural level of output. 
D)  The banking crisis has increased the natural rate of interest. 
E)  The banking crisis has increased the level of productivity. 
A)  The banking crisis has increased the natural level of employment. 
B)  The banking crisis has decreased the natural rate of unemployment. 
C)  The banking crisis has decreased the natural level of output. 
D)  The banking crisis has increased the natural rate of interest. 
E)  The banking crisis has increased the level of productivity.

Question 19

Which of the following defines bank capital?

Accepted Answer

A)  Total liabilities minus deposits. 
B)  Total liabilities plus bonds. 
C)  Total assets plus total liabilities. 
D)  Total assets minus total liabilities. 
E)  Total assets minus bonds. 
A)  Total liabilities minus deposits. 
B)  Total liabilities plus bonds. 
C)  Total assets plus total liabilities. 
D)  Total assets minus total liabilities. 
E)  Total assets minus bonds.

Question 20

What was the primary cause of the 2008- 09 financial crisis?

Accepted Answer

A)  There was irrational exuberance in the stockmarket. 
B)  The biggest housing and credit bubble in decades, originating in the U.S. 
C)  Consumers embarked on a spending binge. 
D)  Banks turned away customers with home loan applications. 
E)  There was a lack of oversight on the banking system. 
A)  There was irrational exuberance in the stockmarket. 
B)  The biggest housing and credit bubble in decades, originating in the U.S. 
C)  Consumers embarked on a spending binge. 
D)  Banks turned away customers with home loan applications. 
E)  There was a lack of oversight on the banking system.

Exam 9: The Crisis

In response to the crisis, the U.S. policymakers implemented:

What are the two channels in which the effects of the financial crisis was transmitted to the macro economy in the U.S.?

Which of the following is called an unconventional monetary policy measure?

The crisis pushed up borrowing costs, lowered stock prices, and sapped consumer and firm confidence. What effect do these have on the IS curve?

An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

Consider the following balance sheet situation of ABC bank: its total assets consist of loans of $50 and bonds of $350; and its total liabilities consist of deposits of $400 and debt of $100. What is the capital of ABC bank?

Consider the following balance sheet situation of ABC bank: its total assets consist of loans of $150 and bonds of $350; and its total liabilities consist of deposits of $300 and debt of $100. What is the capital of ABC bank?

When the economy is in a liquidity trap with a zero interest rate:

What are securitised bonds?

The effectiveness of expansionary monetary policy is limited when which of the following occurs?

The Nikkei, a Japanese stock price index, reached its peak in which of the following years?

What is bank capital and its function?

A primary function of banks is to:

To what extent have monetary policy and fiscal policy been able to limit the severity of the Japanese Slump? Explain.

Which of the following allows the bank to raise the level of capital during a financial crisis for certainty?

The process of banks borrowing from other banks and other investors to finance their asset purchases is known as:

Which of the following is the aggregate supply explanation of the slow U.S. recovery?

Which of the following defines bank capital?

What was the primary cause of the 2008- 09 financial crisis?

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Consumption and Investment

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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