Exam 15: Financial Crises, panics, and Macroeconomic Policy

How did the Fed respond to the financial crisis in 2008? How did the federal government respond?

Explain what herding and leverage are and how they can lead to a bubble.Also explain why leverage can cause the bursting of a bubble to be worse than it otherwise would be.

Give an example of how leverage can be used to increase returns.

Suppose the currency-to-deposit ratio is 25% until a financial panic,which causes people to hoard money,and the currency-to-deposit ratio increases to 200%.Given a reserve requirement of 10%,show what would happen to the money multiplier.

Using the analogy of treating a heart attack victim,what are the three stages of financial recovery?

How did the treatment stage of the recovery from Great Depression differ from the same stage of recovery from the 2008/2009 financial crisis?

What are extrapolative expectations,and why are they essential for the formation of a bubble? If people have extrapolative expectations,what might be true about the effective demand curve for an asset?

Why does leverage often become the means by which bubbles are inflated?

How does herding contribute to bubbles?

Define each of the following and give an example of each relating to the rehabilitation stage of financial recovery: the moral hazard problem,the law of diminishing control,and the bad precedent problem.

What is the difference between systemic and nonsystemic risks? Which ones can be insured against,and which ones can't? Why is this?

What is the bad precedent problem?

What is the process by which a bursting bubble leads to a financial meltdown?

What are quantitative easing tools? Why are they necessary?

Briefly discuss the leveraging that took place in the early 2000s that caused what could have been simply a bursting bubble to turn into a financial crisis.

How was the Great Depression different from the financial crisis of 2008 and 2009?

When a stock market bubble bursts,what happens to real wealth? What happens to nominal wealth?

Why is regulation necessary if a bailout is a likely last resort?

What is the third stage of financial recovery? What happens in this stage?

What made the financial crisis of 2008 and 2009 similar to the Great Depression?