Deck 19: The Financial Crisis and Sovereign Debt

Question 1

The _____________ is that part of the economy associated with the buying and selling of assets on financial markets.

A)flat economy
B)shadow economy
C)real economy
D)financial economy

Answer 1

D

Question 2

An economic bubble refers to when prices of assets and securities rise way above their true or fundamental value.

Answer 2

True

Question 3

The use of mathematics can help to completely eliminate risk from investment.

Answer 3

False

Question 4

Deregulation refers to the rules placed on banks to reduce the risks involved in lending.

Question 5

Which of the following help explains the growth in the sub-prime market?

A)The demand by shareholders for better returns.
B)The existence of a bonus culture which could provide some individuals with millions each year.
C)The desire by individuals to get on the property ladder.
D)The lack of rigour in regulation and oversight by the central banks.
E)All of the above.

Question 6

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.

Question 7

An economic bubble is when

A)prices of assets and securities fall below their true or fundamental value.
B)prices of assets and securities rise way above their true or fundamental value.
C)prices of assets and securities are at their true or fundamental value.
D)prices of assets and securities rise with inflation.

Question 8

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.

Question 9

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

Question 10

The main purpose of financial regulation is to

A)penalize risk averse fund managers in financial institutions.
B)ensure monetary policy is carried out in accordance with the Taylor Rule.
C)create efficiency and equity in financial markets.
D)monitor the remuneration packages of senior banking officials.

Question 11

Asset bubbles can arise because markets ignore fundamentals, and base decisions on future expectations of themselves and others.

Question 12

Asset price bubbles occur because

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 13

De-regulated financial markets mean that

A)financial institutions can trade globally.
B)financial institutions have more freedom to innovate.
C)credit is much easier for the average person.
D)All of the above.

Question 14

The real economy refers to that part of the economy which is concerned with the production of

A)stocks and bonds.
B)Interest rates.
C)goods and services.
D)equity.

Question 15

In a financial crisis, central banks will loosen monetary policy to prevent the crisis getting out of control.

Question 16

Prior to the start of global crisis in 2007, the previous 20 years had been a period of

A)fluctuating macroeconomic stability.
B)macroeconomic stability with sustained growth.
C)both boom and bust periods.
D)consistently high inflation.

Question 17

The shadow banking system refers to financial intermediaries which act like banks but are outside the scope of regulation.

Question 18

Credit markets froze because interest rates were so low that banks thought it was not worth it to lend to each other.

Question 19

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

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

What theory states that problems in financial markets can amplify shocks to the real economy and create a feedback loop, which exacerbates economic problems?

A)Financial causal theory.
B)Financial simulation theory.
C)Financial accelerator theory.
D)All of the above.

Question 21

The higher a government budget deficit is the more likely

A)the risk of default on sovereign debt.
B)economic growth is to stall.
C)It is 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 22

A sign that the 2007-09 global economic crisis was affecting the real economy was

A)the collapse of the housing market.
B)an increase in the availability of credit.
C)consumer spending increased on goods with a high income elasticity of demand.
D)increased borrowing.

Question 23

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

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

Question 24

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.

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

Question 25

Which is NOT a peripheral country within the eurozone?

A)Ireland
B)Germany
C)Latvia
D)Portugal

Question 26

A cyclical deficit occurs where government income and expenditure

A)deviate from a trend path.
B)occur normally over the economic cycle.
C)move in coordinated ways.
D)increase and decrease in a predictable manner over the economic cycle.
E)is disrupted by the normal economic cycle.

Question 27

The securitization of assets relies on

A)banks building up their reserve assets.
B)the backing assets generating a stream of income over time.
C)the present value of income streams rising over time.
D)real interest rates continuing to be negative for at least a five year period.

Question 28

Markets looked to central banks to respond by

A)their speed of intervention.
B)the degree of innovation shown.
C)co-ordinated action.
D)All of the above.

Question 29

Sovereign deficits are financed by

A)governments printing money.
B)governments issuing shares.
C)governments borrowing by issuing bonds.
D)governments paying off their debts.

Question 30

The output gap refers to

A)the difference between current output and trend output.
B)the size of a structural deficit.
C)the difference between economic growth and the level of inflation.
D)the difference between the natural rate of unemployment and the claimant count.

Question 31

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

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 32

In the USA, the Federal Reserve Bank maintained low interest rates for much of the 2000s.This was because the Fed

A)was concerned that inflationary pressures were rising throughout the period.
B)it wanted to encourage banks to build up capital reserves.
C)wanted to maintain economic confidence in the wake of exogenous shocks.
D)realized that ecommerce needed support to become established.

Question 33

What usually happens to interest rates on large sovereign debts?

A)They fall.
B)They remain the same.
C)They rise.
D)They fall in real terms.

Question 34

An accounting practice whereby a firm values assets at current market prices is called

A)market fluctuations.
B)mark-to-market.
C)go-to-market.
D)market swaps.

Question 35

Sovereign debt refers to the bonds issued by national governments to

A)increase returns.
B)finance expenditure.
C)print money.
D)reduce debt.

Question 36

The response of central banks to the credit crunch was

A)to remove some regulatory limitations on banks.
B)to impose new regulatory limitations on banks.
C)to provide additional liquidity to the banking system.
D)to restrict the availability of liquidity to the banking system.

Question 37

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

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 38

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

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 39

The idea of a bank being 'too big to fail' means

A)it has such a large asset base that its risk of failure is eliminated.
B)banks become more risk seeking because they believe they will be rescued if they fail.
C)a lack of competition in financial markets which increases risk aversion.
D)a reduced likelihood of adverse selection in financial markets.

Question 40

A sovereign debt crises is when

A)any government is in debt to over 10% of the GDP.
B)national debt falls.
C)a country is unable to pay back its public debt.
D)All of the above.

Question 41

Which of the following is NOT correct?

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 42

Suppose that the Spanish economy is experiencing a recession, while other countries in the eurozone are in long run macroeconomic equilibrium.What would happen to interest rates on long term government bonds issued by eurozone governments if the Spanish government were to increase its budget deficit dramatically to finance additional government spending? Explain your answer.

Question 43

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

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.

Question 44

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

Question 45

Which of the following is not true with regard to government budget deficits?

A)Budget deficits reduce capital investment, future productivity and, therefore, future incomes.
B)Budget deficits place the burden of current spending on future taxpayers.
C)Budget deficits should be scrutinized because they are the only way to transfer wealth across generations of taxpayers.
D)Budget deficits reduce national saving.

Question 46

Which of the following is correct?

A)Deficits always require people to consume at the expense of their children.
B)If the government uses funds to pay for investment programs, the debt need not burden future generations.
C)If the government is in debt it must be running a deficit currently.
D)The current government debt is a large share of lifetime income.

Question 47

Suppose that the government goes into deficit in order to build better schools.Would this deficit be a burden on future generations?

Question 48

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

Question 49

Is it possible that deficits do not burden future generations?

Question 50

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

Question 51

Explain the difference between cyclical deficits and structural deficits.

Question 52

What is the sub-prime market?

Question 53

Which of the following is true?

A)The European Financial Stability Fund (EFSF) replaced the European Stability Mechanism (ESM).
B)The ESM assumed the tasks of the EFSF.
C)The ESM is now part of the International Monetary Fund (IMF).
D)The ESM is now part of the World Bank.

Question 54

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

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.

Question 55

In balancing a budget, economic booms provide opportunities to

A)issue more bonds.
B)buy back bonds.
C)increase deficits.
D)raise taxes.

Question 56

Discuss some of the arguments for more austerity in the eurozone.

Question 57

Which increase does not apply to large structural deficits?

A)The likelihood of default by governments.
B)The costs of servicing the debt.
C)Currency instability.
D)All of the above.

Question 58

Why did a rise in interest rates cause such a problem in the sub-prime market?

Question 59

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

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 60

Which government policy is most likely to increase future productivity?

A)Selling more bonds because the sovereign deficit has increased.
B)Increasing spending on infrastructure rather than welfare payments.
C)Decreasing both spending on welfare and on infrastructure investment.
D)Cutting back on education spending.