Deck 10: The Great Recession: a First Look

Question 1

What is the fed funds rate?

A)interest rate charged by banks to their best customers
B)ideal inflation rate
C)interest rate charged by banks for overnight loans
D)interest rate suggested by the Taylor rule
E)sustainable level of federal budget deficit

Answer 1

C

Question 2

Securitization is defined as:

A)bolstering defense spending.
B)making it more difficult to enter the United States illegally.
C)creating incentives for firms to protect proprietary information.
D)disallowing the use of collateral for loans.
E)lumping large numbers of financial instruments together and selling pieces to different types of investors.

Answer 2

E

Question 3

When did the housing bubble burst?

A)2009
B)1995
C)2006
D)2008
E)2001

Answer 3

C

Question 4

During the Great Recession,the unemployment rate peaked at

A)12.1 percent.
B)9.5 percent.
C)10.1 percent.
D)25.8 percent.
E)6.7 percent.

Question 5

Between May 2004 and May 2006,the Fed __________ its interest rate __________.

A)raised;from 1.25 percent to 5.25 percent
B)lowered;from 5.25 percent to 0 percent
C)kept;fixed at 3.25 percent
D)lowered;from 6.5 percent to 1 percent
E)The Fed does not control interest rates.

Question 6

The Great Recession began in __________ and ended in __________.

A)December 2007;June 2009
B)December 2008;June 2010
C)May 2008;March 2010
D)June 2007;December 2009
E)June 2007;June 2009

Question 7

Which of the following financial institutions converted to bank holding companies in the financial collapse?

A)Wells Fargo
B)Goldman Sachs
C)Morgan Stanley
D)Citicorp
E)b and c

Question 8

In __________ ,the Fed began to raise the federal funds rate in response to __________.

A)mid-2004;rising housing prices
B)mid-2008;a bubble in stock markets
C)mid-2007;the decline in housing price
D)mid-2000;rising unemployment rates
E)early 2009;rising inflation

Question 9

According to The Economist,by 2006 __________ of new home loans were __________ loans.

A)one-half;ARM one-third
B)one-fifth;subprime
C)only 1 percent;traditional 30-year-fixed
D)almost all;inflation-indexed
E)three-fourths;subprime

Question 10

What declined during the Great Recession?

A)unemployment rate
B)the median duration of unemployment
C)federal government deficit
D)the size of the Fed's portfolio
E)world GDP

Question 11

What is an indicator of the extent of risk in financial systems?

A)the difference between the unemployment rate and the natural rate of unemployment
B)falling commodity prices
C)the spread between the monthly LIBOR rate and U.S.T-bill yield
D)the spread between inflation-indexed and nonindexed U.S.bonds
E)the number of banks applying for federal assistance

Question 12

What incentive did banks have to give large loans to households with relatively little income?

A)rapidly rising housing prices
B)low interest rates
C)high rates of inflation
D)high unemployment rates
E)government guarantees

Question 13

Which of the following is not a securitized asset?

A)mortgage-backed securities
B)asset-backed commercial paper
C)collateralized debt obligations
D)commercial bonds
E)CDOs

Question 14

Which investment bank collapsed in September 2008?

A)Merrill Lynch
B)Goldman Sachs
C)Lehman Brothers
D)Wells Fargo
E)Barclays

Question 15

When was the deepest recession since the end of World War II?

A)1981-82
B)2007-09
C)1973-75
D)1948-49
E)1969-70

Question 16

Which country did not experience a financial crisis in the 1990s?

A)Mexico
B)Russia
C)Asia
D)Saudi Arabia
E)Argentina

Question 17

In 2009,the Congressional Budget Office projected the debt-to-GDP ratio to __________ over the next decade.

A)double from 41 percent to 82 percent
B)triple from about 27 percent to 82 percent
C)half from 82 percent to 41 percent
D)stay about the same
E)climb to over 100 percent

Question 18

The housing bubble was probably not fueled by __________.

A)loosening lending standards
B)high unemployment
C)low interest rates
D)speculation
E)declining stock markets

Question 19

Between the middle of 2006 and April 2009,the national index for the U.S.housing market:

A)declined by about 10.1 percent.
B)increased by about 2 percent.
C)declined by about 33 percent.
D)was flat.
E)grew at the rate of inflation.

Question 20

The global savings glut can be defined as:

A)the increase in foreign savings moving into the United States in search of investment opportunities.
B)the rapid increase in personal saving rates in the United States leading to increased lending to foreign countries.
C)the response of U.S.savings to low interest rates in the early 2000s.
D)the decline in saving rates globally.
E)the precautionary savings increase in response to the establishment of the Euro.

Question 21

The __________ was hastily designed to __________ in September 2008.

A)Troubled Asset Relief Program;prevent financial collapse
B)American Recovery and Reinvestment Act;prevent financial collapse
C)New Deal;prevent tax revenues from falling
D)Savings and Loan bank bailout;prevent declining mortgage applications
E)Sherman Antitrust Act;reduce commercial banks' power over financial markets

Question 22

In contrast to the dot-com stock market bubble,the bursting of the housing bubble __________,implying __________.

A)affected almost every financial institution;risk was well-diversified
B)affected a small number of investors;the risk was not well-diversified
C)hurt every household;households paid too high an interest rate
D)was attenuated by a quick response by the Fed;the Fed's policy was effective
E)increased household expenditures;it had little effect on the macroeconomy

Question 23

Short-run output __________ in the last quarter of 2008 and __________ by the middle of 2009.

A)growth was flat;recovered to a modest 1.2 percent
B)was positive;fell to -3 percent
C)turned negative;bottomed out at over -6 percent
D)equaled zero;fell to -2 percent
E)was rising;unemployment was 8 percent

Question 24

__________ peaked at the end of __________.By February 2010,__________.

A)Total non-farm employment;2007;over 8 million jobs were lost
B)The unemployment rate;2006;inflation was 0 percent
C)Median weeks of unemployment;2007;the unemployment rate had fallen to 7 percent
D)Aggregate weekly hours;2007;inflation was negative
E)The inflation rate;2008;the unemployment rate had risen to 11 percent

Question 25

Part of the rapid increase in oil prices was due to __________.

A)declining demand in OECD countries
B)falling supplies from OPEC countries
C)lower inflation expectations in the United States
D)the financial meltdown
E)increasing demand in China

Question 26

The average decline in GDP growth for all recession since 1950 is __________ percent,but for the Great Recession it was __________ percent.

A)-2.1;-6.1
B)-0.4;-31.4
C)-3.7;-1.7
D)-1.7;-3.7
E)0;2.2

Question 27

In mid-2008 oil prices:

A)stayed constant.
B)rose by 40 percent.
C)fell to $30 per barrel.
D)rose to $140 per barrel.
E)rose to $70 per barrel.

Question 28

The increased spread between three-month LIBOR and three-month bond yields led to __________.This is a classic example of __________.

A)reduced lending;a liquidity crisis
B)a rush to buy bonds;an asset bubble
C)falling risk in financial markets;risk sharing
D)increased inflationary expectations;cost push inflation
E)increased consumer expenditure;the monetary transmission mechanism

Question 29

In addition to oil price increases in 2008,

A)natural gas prices fell.
B)the interest rate premium fell.
C)commodity prices also rose.
D)inflation remain unchanged.
E)aggregate supply increased.

Question 30

In the middle of 2009 __________;by February 2010 __________.

A)over 8 million jobs were lost;short-run output bottomed out at over -6 percent
B)short-run output bottomed out at over -6 percent;over 8 million jobs were lost
C)inflation was 5 percent;the unemployment rate was 12 percent
D)the federal funds rate was 5 percent;it had fallen to 1 percent
E)unemployment fell to 8 percent;home sales were rising steadily

Question 31

For the following questions use the information in Table 10.1,which shows real GDP and potential real GDP for the years 2001-2010.
According to the data in Table 10.1,what years did the Bush administration enjoy an expansionary gap?

A)2005 and 2006
B)2007-2009
C)2001,2005,2006
D)2002,2003,2007
E)2001

Question 32

When the Fed began to raise the federal funds rate in 2004,

A)investors quickly sold U.S.treasuries.
B)default on sub-prime mortgages increased and housing prices fell.
C)inflation picked up steam.
D)housing prices recovered and grew,but more slowly than in the previous 10 years.
E)stock markets retreated and fell to all-time lows.

Question 33

For the following questions use the information in Table 10.1,which shows real GDP and potential real GDP for the years 2001-2010.
According to the data in Table 10.1,during which years was the economy in an expansion?

A)2001
B)2004
C)2002
D)2003
E)a and b

Question 34

For the following questions use the information in Table 10.1,which shows real GDP and potential real GDP for the years 2001-2010.
According to the data in Table 10.1,when was the recession deepest?

A)2001
B)2003
C)2009
D)2008
E)not enough information

Question 35

For the following questions use the information in Table 10.1,which shows real GDP and potential real GDP for the years 2001-2010.
According to the data in Table 10.1,about how much did short-run output fluctuations equal in 2001 and 2008,respectively?

A)-1.6%,1.1%
B)1.7%;-1.1%
C)101.6;147.2
D)-184.9;147.2
E)not enough information

Question 36

The acronym "TARP" stands for:

A)Total Assistance for Retired Persons
B)Tax And Revenue Program
C)Troubled Asset Relief Program
D)Treasury Asset Risk Persistence
E)Total Asset Rate Possibility

Question 37

In a typical recession,the only __________ expenditure rises.

A)investment
B)exports
C)imports
D)inflation
E)government

Question 38

The acronym "CDO" stands for:

A)constant deficit obligation.
B)collateralized debt obligation.
C)congressional debt organization.
D)corporate deposit opportunities.
E)capital default ownership.

Question 39

The sharp swing in core inflation in 2008-09 was due to:

A)movements in energy prices.
B)the sharp decline in housing prices.
C)There was no sharp swing in core inflation.
D)rapid increases in wages.
E)rapidly rising unemployment.

Question 40

Which of the following financial institutions was taken over by the federal government?

A)Freddie Mac
B)Bank of America
C)Fannie Mae
D)Merrill Lynch
E)a and c

Question 41

For the following questions use the information in the followingtable.
Given the information in Table 10.2,if the value of this bank's investments decrease by $1,000,what is the bank's equity?

A)$1,000
B)$3,900
C)$3,100
D)$2,400
E)not enough information

Question 42

For the following questions use the information in the followingtable.
Given the information in Table 10.2,the banks' net worth is equal to:

A)$3,400.
B)-$2,000.
C)$2,000.
D)-$700.
E)not enough information

Question 43

What is the industry Mr.McGuire advises Benjamin to enter after college in the movie The Graduate?

A)microchips
B)genetic engineering
C)leverage
D)plastics
E)import-export

Question 44

When a bank's assets cannot cover its liabilities,the bank is:

A)illiquid.
B)nationalized.
C)immediately shut down.
D)bought out by its shareholders.
E)insolvent.

Question 45

For the following questions use the information in the followingtable.
Given the information in Table 10.2,the banks' assets are equal to __________ and liabilities are __________.

A)$9,600;$11,600
B)-$2,000;$2,000
C)$6,800;$7,500
D)not enough information
E)$11,600;$9,600

Question 46

For the following questions use the information in the followingtable.
Given the information in Table 10.2,this bank's liabilities are equal to:

A)$9,600.
B)$11,600.
C)-$2,000.
D)$700.
E)$3,400.

Question 47

When was the deepest recession in the post-World War II period?

A)2007-09
B)1981-82
C)2001
D)1973-75
E)1953-54

Question 48

When the investment bank Bear Stearns collapsed,its leverage ratio was:

A)2 to 1.
B)35 to 1.
C)8 to 1.
D)16 to 1.
E)1 to 12.

Question 49

According to the IMF,which of these countries experienced positive growth in 2009?

A)India
B)the United States
C)China
D)Germany
E)a and c

Question 50

Which of the following is not an asset on a bank's balance sheet?

A)loans
B)deposits
C)cash
D)reserves
E)investments

Question 51

For the following questions use the information in the followingtable.
Given the information in Table 10.2,if the value of this bank's investments decrease by $1,000,what is the approximate leverage ratio of this bank?

A)10.60
B)3.87
C)8.60
D)2.78
E)not enough information

Question 52

Net worth is equal to a bank's:

A)investments minus deposits.
B)cash plus reserves.
C)deposits plus loans.
D)loans minus capital.
E)total assets minus its total liabilities.

Question 53

The Federal Deposit Insurance Corporation was established,in part,to:

A)prevent bank runs.
B)make loans to insolvent banks.
C)increase confidence in investment banks.
D)eradicate bank risk altogether.
E)underwrite consumer loans.

Question 54

Which of the following countries did the financial crisis affect?

A)The United States
B)Germany
C)Japan
D)France
E)all of the above

Question 55

When all depositors converge on a bank to remove their deposits there is a:

A)bank run.
B)bank panic.
C)liquidity crisis.
D)financial meltdown.
E)insolvency.

Question 56

For the following questions use the information in the followingtable.
Given the information in Table 10.2,if reserve requirements are 3 percent and capital requirements are 10 percent the bank meets:

A)reserve requirements,but not capital requirements.
B)neither reserve requirements nor capital requirements.
C)both reserve and capital requirements.
D)capital requirements,but not reserve requirements
E)not enough information

Question 57

In Table 10.2,Column A is bank __________ and Column B is bank __________.

A)assets;liabilities
B)liabilities;assets
C)on-balance sheet activity;off-balance sheet activity
D)"shadow" activity;"open air" activity
E)not enough information

Question 58

A significant cause of the 2008 financial crisis was that financial institutions were __________.

A)unfunded
B)over-leveraged
C)already insolvent
D)nationalized
E)illiquid

Question 59

For the following questions use the information in the followingtable.
Given the information in Table 10.2,what is the approximate leverage ratio of this bank?

A)4.80
B)1.21
C)5.80
D)0.83
E)not enough information

Question 60

For the following questions use the information in the followingtable.
Given the information in Table 10.2,the banks' assets are equal to __________.

A)$9,000
B)$2,000
C)$11,600
D)-$700
E)not enough information

Question 61

In the months following the collapse of Lehman Brothers,banks became increasingly worried about:

A)rising real estate prices.
B)lending money via commercial paper.
C)the rapid loss of reserves.
D)spikes in the federal funds rate.
E)exchange rate volatility.

Question 62

The savings glut in the early and mid-2000s led to an increase in U.S.interest rates,which spurred a stock market bubble.

Question 63

Subprime loans are loans made to households which do not necessarily meet "standard" lending restrictions.

Question 64

Use the following Figure 10.1,which shows the daily three-month treasury yield in September 2008.
Consider the data in Figure 10.1.What does the data for mid-September in this figure suggest?

A)Increasing investor confidence in the effectiveness of TARP led to smaller purchases of U.S.treasuries.
B)There was a rapid movement of assets from treasuries to stocks.
C)In the aftermath of the collapse of Lehman Brothers investors fled to the safety of short-term treasuries.
D)Prices of gold declined in line with short-term treasury yields.
E)GM and Chrysler declared bankruptcy.

Question 65

In the recent financial crisis,the banks' problems arose from:

A)bank runs.
B)revaluation of loans.
C)a rapid loss of reserves.
D)the riskiness of thirty-year fixed mortgages.
E)lending money in return for short-term debt.

Question 66

According to The Economist,in 2006 approximately one-half of all home loans were subprime.

Question 67

In what year was the Federal Deposit Insurance Corporation set up?

A)2007
B)1933
C)1945
D)1991
E)1983

Question 68

Between May 2004 and May 2006,the Fed raised the federal funds rate by 4 percentage points due to rising inflation worries.

Question 69

By August of 2007,almost 16 percent of all subprime loans were in default.

Question 70

In the last months following the collapse of __________,interest rates on commercial paper __________ and access to this form of liquidity __________.

A)Lehman Brothers;rose by over 5 percent;contracted
B)Washington Mutual;fell by over 3 percent;expanded
C)Merrill Lynch;rose by 5 percent;stayed constant
D)General Motors;rose by over 3 percent;contracted
E)AIG;stayed constant;remain unchanged

Question 71

The federal funds rate is the rate the Fed charges to member banks.

Question 72

In 1933 the __________ was established to prevent bank runs;in 2008 the __________ was set up to increase liquidity in financial markets.

A)Troubled Asset Relief Fund;AIG
B)Federal Deposit Insurance Corporation;Troubled Asset Relief Fund
C)U.S.Department of Treasury;Comptroller of the Currency
D)Federal Reserve System;Federal Deposit Insurance Corporation
E)Depository Institutions Deregulation and Monetary Control Act;Glass-Steagall Act

Question 73

When a bank experiences a bank run,it may have to:

A)print money to cover deposits.
B)pay a higher insurance premium.
C)offer depositors an IOU.
D)call in its loans.
E)increase its reserves.

Question 74

Use the following Figure 10.1,which shows the daily three-month treasury yield in September 2008.
Consider the data in Figure 10.1.What event precipitated the change in the yield in mid-September?

A)the expanded trade deficit with China
B)the election of Barack Obama
C)the bankruptcy of Lehman Brothers
D)the Greek fiscal crisis
E)the continuing Japanese recession

Question 75

During the 1990s and early 2000s,a number of developing countries suffered from financial crises.This led to an increase in investment in these countries.

Question 76

The basic principle of securitization is that bundling a variety of different types of loans into a new asset and selling pieces of that asset to many investors will diversify risk.

Question 77

In 1933 the __________ was set up to __________.

A)Troubled Asset Relief Fund;shore up insolvent commercial banks
B)Federal Reserve System;centralize monetary policy
C)Federal Deposit Insurance Corporation;help prevent bank runs
D)Depository Institutions Deregulation and Monetary Control Act;repeal the Glass-Steagall Act
E)U.S.Department of Treasury;monitor investment bank activity

Question 78

The Case-Shiller index of housing prices dropped about 10 percent when the housing bubble burst.

Question 79

Saudi Arabia did not suffer from a financial crisis in 2007-2009.

Question 80

Between 1996 and 2006,housing prices averaged about 10 percent annual growth per year.