Exam 14: The Great Recession and the Short-Run Model

The quote "When banking stops, credit stops, and when credit stops, trade stops, and when trade stops-well, the city of Chicago had only eight days of chlorine on hand for its water supply. . . . The entire modern world is premised on the ability to buy now and pay later" is credited to:

The return to a risky asset can be written as .

If the rate of inflation is 2 percent, the output gap is 0 percent, the nominal interest rate is 3 percent, and the unemployment rate is 10 percent, what is the real interest rate?

When we add the financial friction to the AD curve it:

Refer to the following figure when answering the following questions. Figure 14.2: IS-MP Curve -Consider Figure 14.2. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, with a large, positive financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________.

In standard circumstances a firm ________ when its ________. In financial markets this approach did not work following the ________.

When the Fed lowers the nominal interest rate to zero, what is the real interest rate?

In response to the financial crisis, the Fed effectively lowered interest rates to ________ percent.

Suppose a bank purchases $100 of an asset. To finance this purchase, it uses $99 dollars of borrowed funds and $1 of bank capital. To what does this lead?

In the AS/AD framework, the financial friction appears as a:

The Troubled Asset Relief Program was originally designed to ________, but funds were ultimately used ________.

Economists believe that the way that policymakers handled the financial crisis:

When a financial institution is deemed too systematically important to go under, it is ________. This leads to ________.

When there is deflation:

Refer to the following figure when answering the following questions. Figure 14.3: AS/AD Model -Consider Figure 14.3. If the economy begins in its long-run equilibrium and there is an increase in the economy's financial friction, the economy would move from point ________ to point ________.

The liquidity trap occurs when:

The Squam Lake Group is a group of:

Between January 1985 and January 1990, the NIKKEI, the Japanese stock index, rose an astounding 217 percent. Tokyo housing prices had jumped to $93,000 per square foot. Then stock and housing prices plummeted. The NIKKEI finally bottomed out in April 2003 and had lost about 79 percent of its value from January 1990. Explain the macroeconomic effects of this so-called Lost Decade in Japan. During this period, Japan experienced a deflationary spiral; explain. If you were the chairman of the Bank of Japan, what prescription would you apply? If you were the government of Japan, what would you do? Compare this to the United States' Great Recession.

The effect of the subprime loan crisis pushed the financial friction up. This pushed the MP curve up and the AD curve down.

The burst of the housing bubble can be represented in the IS/MP model as a decline in .