Deck 14: The Financial Crisis and the Great Recession

Question 1

During the real estate boom of the early 2000s,some banks operated with leverage ratios in excess of 30-to-1.

Answer 1

True

Question 2

Both monetary policy and fiscal policy were used in response to the recession of 2007-2009.

Answer 2

True

Question 3

During the financial crisis associated with the Great Recession,the interest rate spread between Treasury bills and bank-to-bank lending increased substantially.

Answer 3

False

Question 4

An increase in the price of a particular bond implies an increase in the interest rate for that bond.

Question 5

In response to the economic downturn,the federal government enacted a fiscal stimulus bill with funding in excess of $700 billion.

Question 6

The first signs of major financial problems associated with the financial sector and real estate investment appeared in 2009.

Question 7

The Federal Reserve helped J.P.Morgan purchased Bear Stearns by agreeing to purchase some unwanted Bear Stearns assets.

Question 8

If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 4.4%,then the spread on this particular corporate bond is 5.9%.

Question 9

Spending on newly constructed homes is part of the investment component of GDP.

Question 10

In 2008,interest rates on Treasury securities fell even though most other interest rates were rising.

Question 11

A larger interest rate spread in 2003-2006 is one of the factors that led to the recession of 2007.

Question 12

During the 2000 to 2006 time period,housing prices increased but only to a limited degree.

Question 13

In hindsight,mortgage-backed securities implied very limited risk because the underlying mortgages were spread across different geographic areas.

Question 14

Leverage is essential to a bank's profitability but it also increases risk.

Question 15

There is essentially no risk of default for U.S.government securities.

Question 16

Borrowed funds are used in financing every component of GDP.

Question 17

The United States has not experienced a recession as severe as the 2007-2009 downturn since the 1930s.

Question 18

It would be impossible to have an unlevered bank.

Question 19

The monetary and fiscal stimulus response to the Great Recession resulted in an immediate increase in real GDP.

Question 20

Subprime mortgages frequently featured small or zero down payments.

Question 21

A bubble is best defined as

A) an increase in the price of an asset resulting from fundamentals causes.
B) an increase in the price of an asset resulting from factors other than fundamentals causes.
C) a decrease in the price of an asset resulting from fundamentals causes.
D) a decrease in the price of an asset resulting from factors other than fundamentals causes.

Question 22

Assume that Michaela purchases $12,000 worth of a stock.To do so she uses $2,000 of her own money and borrows the remaining $10,000 at an 8.0% interest rate.If the stock's value increases by 20% in one year and she sells the stock at that time,what is her rate of return?

A) 13%
B) 16%
C) 20%
D) 80%

Question 23

If a 10-year Treasury bond pays 3.1% and a 10-year corporate bond pays 7.4%,what is the interest rate spread on this particular corporate bond?

A)4.3%
B)7.4%
C)10.5%
D)22.9%

Question 24

If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 6.0%,what is the interest rate spread on this particular corporate bond?

A)4.0%
B)4.5%
C)7.5%
D)9.0%

Question 25

Assuming that the reserve ratio is 10%,what amount of excess reserves are held by with the bank balance sheet listed below?

A) zero
B) $240,000
C) $280,000
D) $320,000

Question 26

When the housing bubble burst,prices did not fall particularly severely in

A) Arizona.
B) California.
C) Nevada.
D) South Dakota.

Question 27

The Fed's loan that effectively nationalized AIG was approved by Congress.

Question 28

What is the leverage implied by the bank balance sheet listed below?

A) 10-to-1
B) 12-to-1
C) 20-to-1
D) 21-to-1

Question 29

The recession of 2007-2009 was the most severe economic downturn in the U.S.since the

A) 1930s.
B) 1950s.
C) 1970s.
D) 1980s.

Question 30

The increased level of excess reserves that many banks held in 2008 made traditional monetary policy less effective.

Question 31

If the reserve ratio was 10% for the bank with the balance sheet listed below,then this bank is being

A) aggressive as indicated by a small amount of excess reserves.
B) aggressive as indicated by a large amount of excess reserves.
C) cautious as indicated by a small amount of excess reserves.
D) cautious as indicated by a large amount of excess reserves.

Question 32

What is the leverage implied by the bank balance sheet listed below?

A) 2-to-1
B) 7-to-1
C) 8-to-1
D) 10-to-1

Question 33

A bank would be considered insolvent when the value of its liabilities exceed its

A) assets.
B) required reserves.
C) actual reserves.
D) net worth.

Question 34

Assume that Sharon purchases $5,000 worth of a stock.To do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate.If the stock's value decreases by 10% in one year and she has to sell the stock at that time,what is her rate of return?

A) −10%
B) −50%
C) −78%
D) −156%

Question 35

Expansionary monetary policy is essentially finished once the Fed reduces the federal funds rate to zero.

Question 36

When the housing bubble burst,prices fell particularly severely in

A) Georgia.
B) Nevada.
C) Pennsylvania.
D) West Virginia.

Question 37

Which of the following was not a typical characteristic of subprime mortgages?

A) low down payments
B) loans to borrowers with poor credit histories
C) limited incomes with which to make loan payments
D) fixed interest rates

Question 38

Despite both monetary and fiscal policy actions,real GDP declined at an annualized rate of 6% during the last quarter of 2008 and the first quarter of 2009.

Question 39

The central idea behind the Troubled Asset Relief Program was for the Treasury to sell mortgage-backed securities to interested investors,wait for prices to increase,and then buy these securities back for a profit.

Question 40

Most economists feel that overly strict financial regulation from 2000 to 2006 contributed to the financial crisis of 2007-2009.

Question 41

As a result of Lehman's collapse,real GDP first began to fall in

A) the fourth quarter of 2007.
B) the second quarter of 2008.
C) the third quarter of 2008.
D) the first quarter of 2009.

Question 42

Which elements of GDP were affected by the financial crisis and the lack of available credit?

A) consumption and business investment only
B) consumption and government spending only
C) consumption, business investment and government spending only
D) consumption, business investment, government spending and imports/exports

Question 43

Which of the following was not a lesson from the 2007-2009 financial crisis?

A) Financial regulations were too "light" prior to the crisis.
B) Excessive complexity made the financial system more fragile and dangerous.
C) Both monetary policy and fiscal policy are needed in order for the economy to recover.
D) Regulatory failures were based primarily on poor job performance.

Question 44

As a result of the Great Recession,most financial markets hit bottom around

A) September 2008
B) March 2009
C) September 2009
D) March 2010

Question 45

Which of the following was a lesson from the 2007-2009 financial crisis?

A) The financial system needed more leverage in order to operate.
B) The job of stabilizing the economy should be assigned exclusively to monetary policy.
C) Monetary policy is finished once the Fed reduces the federal funds rate to zero.
D) The business cycle still exists.

Question 46

As a result of the Great Recession,job growth did not resume until

A) September 2008
B) March 2009
C) September 2009
D) March 2010

Question 47

The 2009 fiscal stimulus bill represented approximately

A)5.5% of GDP and was designed to close the expansionary gap.
B)5.5% of GDP and was designed to close the recessionary gap.
C)7.8% of GDP and was designed to close the expansionary gap.
D)7.8% of GDP and was designed to close the recessionary gap.

Question 48

In 2007,which U.S.firm showed the first indication of significant problems in the financial sector?

A) AIG
B) Bear Stearns
C) J.P. Morgan Chase
D) Lehman Brothers

Question 49

Mortgage-backed securities became a significant issue because

A) I above only
B) II above only
C) both I and II above
D) neither I nor II above

Question 50

In computing GDP,new home construction adds to

A) consumption.
B) investment.
C) government spending.
D) net exports.

Question 51

In 2008,the Fed utilized expansionary monetary policy which was made

A) more effective as banks held more excess reserves.
B) less effective as banks held more excess reserves.
C) more effective as banks held less excess reserves.
D) less effective as banks held less excess reserves.

Question 52

What amount of money was appropriated by Congress for fiscal stimulus bill of 2009?

A) $225 billion
B) $252 billion
C) $700 billion
D) $787 billion

Question 53

What was the lowest federal funds rate target the Fed set in response to the financial crisis?

A) 0%
B)1.8%
C)2.0%
D)2.2%

Question 54

The intended use of TARP funds was to

A) support the FDIC.
B) increase consumers' disposable income.
C) fund "shovel-ready" projects.
D) purchase unwanted securities.

Question 55

Which of the following are not valid arguments against the effectiveness of the fiscal stimulus bill?

A) Employment continued to fall into early 2010.
B) Without stimulus recessions come to an end naturally.
C) State and local government spending increased.
D) Monetary policy played a large role in stimulating the economy.

Question 56

Which of the following was not a factor that contributed to the subprime mortgage crisis?

A) f security derived from FDIC insurance on mortgage loans
B) lower down payments
C) households devoting 25% or more of their income to mortgage payments
D) lending to households with adverse credit ratings

Question 57

Which of the following are accurate arguments suggesting that the fiscal stimulus did work?

A) Real GDP growth moved from negative to positive in 2009.
B) Employment increased in 2009.
C) The economy has natural self-correcting mechanisms.
D) The return on bailout assets reduced the deficit.

Question 58

The Lehman Brothers bankruptcy triggered a financial panic that featured

A) an increase in Treasury interest rates and an increase in most other interest rates.
B) an increase in Treasury interest rates and a decrease in most other interest rates.
C) a decrease in Treasury interest rates and an increase in most other interest rates.
D) a decrease in Treasury interest rates and a decrease in most other interest rates.

Question 59

The Federal Reserve stepped in to help

A) Bear Stearns but not Lehman Brothers.
B) Lehman Brothers but not Bear Stearns.
C) both Bear Stearns and Lehman Brothers.
D) neither Bear Stearns nor Lehman Brothers.

Question 60

What amount of money was appropriated by Congress for the Troubled Asset Relief Program?

A) $225 billion
B) $252 billion
C) $700 billion
D) $787 billion

Question 61

Which of the following was not a lesson from the 2007-2009 financial crisis?

A) Regulatory failures were the result of weaknesses across the regulatory structure.
B) The financial system operated with too much leverage.
C) The business cycle no longer applies to economic analysis.
D) Monetary policy alone may not be sufficient to stabilize aggregate demand.