Deck 15: Financial Crises, stabilization, and Deficits

Question 1

The general trend in the S&P 500 stock index since 1948 has been

A)flat.
B)increasing.
C)decreasing
D)there has been no trend but it has been very volatile.

Answer 1

B

Question 2

The Dow-Jones Industrial Average index is all of the following EXCEPT

A)an index based on 30 actively traded large companies on the New York Stock Exchange.
B)the most widely followed U.S.stock index.
C)the oldest U.S.stock index.
D)representative of the U.S.economy.

Answer 2

D

Question 3

A bond is

A)a share of ownership in a company.
B)a document that formally promises to repay a loan.
C)a promise to pay a dividend.
D)a non-contingent payment.

Answer 3

B

Question 4

If the interest rate falls,you would expect the price of any stock to

A)rise.
B)fall.
C)be unaffected.
D)fall to zero.

Question 5

A share of stock

A)is a fractional ownership of the firm.
B)gives the owner with other owners the right to pick the management of the company.
C)does not promise a fixed annual payment.
D)all of the above

Question 6

If the expected future earnings of a company goes up,you would expect the price of its stock to

A)rise.
B)fall.
C)be unaffected.
D)fall to zero.

Question 7

The Standard and Poor's 500 index is

A)an index of a basket of consumer good purchased by the typical consumer.
B)an index based on the stock prices of 30 actively traded large companies.
C)an index based on the 500 largest firms traded in the three biggest stock markets.
D)an index of 5,000 companies traded on the national association of securities dealers automatic quotation system.

Question 8

If the risk associated with a company goes up,you would expect the price of its stock to

A)rise.
B)fall.
C)be unaffected.
D)fall to zero.

Question 9

If a share of stock is correctly valued today,a bubble in the stock market is when you purchase a stock because

A)you expect future dividends to rise.
B)you expect interest rates to fall.
C)you expect other people will be willing to pay more for the stock in the future.
D)you expect interest rates to rise.

Question 10

Among the factors that determine the price of a share of stock in a firm is

A)expected dividends.
B)the number of workers the firm has.
C)the number of years the firm has existed.
D)the time to maturity of a bond.

Question 11

A capital gain is

A)when you can sell an asset for more than you paid for it.
B)when you increase the plant and equipment you own.
C)when your dividends rise.
D)when your coupon payment rises.

Question 12

If you think the price of a share of stock reflects its true value,but you buy it anyway because you expect to be able to sell it later at a higher price,then you are participating in

A)a stock market price bubble.
B)insider trading.
C)hedging.
D)fraud.

Question 13

The owners of a company are its

A)bond holders.
B)employees.
C)stockholders.
D)A and C

Question 14

A firm issues bonds to

A)borrow money.
B)earn a return.
C)lend money.
D)influence monetary policy.

Question 15

One would expect the price of a share of stock to fall if

A)the interest rate rises.
B)expected dividends paid on the stock rise.
C)the risk of the business falls.
D)the economy expands.

Question 16

You would expect the price of a share of stock to rise if

A)the expected dividend of the stock rose.
B)the economy went into recession.
C)the price level was declining.
D)interest rates rise.

Question 17

Firms can finance capital spending by doing all of the following EXCEPT

A)selling stock in the company.
B)issuing bonds.
C)borrowing from a bank.
D)paying dividends.

Question 18

Dividends

A)must be paid annually.
B)are a return on the money risked on a share of stock.
C)are set by the Securities and Exchange commission.
D)are guaranteed.

Question 19

A firm might issue stock to

A)finance a capital project.
B)decrease the number of owners.
C)to increase its debt.
D)employ more people.

Question 20

To finance a capital expenditure a firm can,

A)buy bonds.
B)engage in monetary policy.
C)sell stock in the company.
D)all of the above

Question 21

When there is a stock market crash

A)wealth and consumption rise.
B)wealth rises and consumption falls.
C)wealth falls and consumption rises.
D)wealth and consumption fall.

Question 22

If interest rates are positive,one dollar today is worth

A)more than a dollar a year from now.
B)less than a dollar a year from now.
C)the same as a dollar a year from now.
D)nothing.

Question 23

If you own a share of stock in a company and the risk associated with its business rises you would expect

A)a capital gain.
B)a capital loss.
C)a higher dividend.
D)a bubble.

Question 24

Rising stock prices increase investment because

A)the rising prices increase firm profits and make investment out of retained earnings easier.
B)firms can raise more money per share of stock sold.
C)rising stock prices guarantee an increased level of retained earnings.
D)interest rates are lower.

Question 25

Which of the following chances has the biggest expected return?

A)a 50% chance of winning $1,600 and a 50% chance of winning $0
B)a 100% chance of getting $800
C)a 50% chance of winning $1,600,25% chance of winning $3,200 and a 25% chance of losing $3,200
D)All of the above have the same expected return.

Question 26

A boom in the stock market affects the economy because

A)firms invest more as demand grows.
B)consumers consume less with their money tied up in assets.
C)the stock market causes the money supply to rise.
D)interest rates fall.

Question 27

From 1995 to 2000,the stock market as measured by the S&P 500 index

A)bust a bubble.
B)had a record boom.
C)declined in real terms.
D)was flat.

Question 28

Which of the following chances has the biggest expected return?

A)a 60% chance of winning $2,400 and a 40% chance of winning $0
B)a 100% chance of getting $1,200
C)a 50% chance of winning $1,200,20% chance of winning $2,400 and a 30% chance of losing $2,400
D)All of the above have the same expected return.

Question 29

A boom in the stock market affects the economy because

A)firms invest more as demand grows.
B)consumers consume more as stock prices increase.
C)wealth of consumers grows as stock prices increase.
D)all of the above

Question 30

A $1.00 change in the value of stocks changes consumption and investment by about

A)$1.10.
B)$1.00.
C)$.10.
D)$.04.

Question 31

Between the first quarter of 2000 and the first quarter of 2006,the value of housing wealth

A)increased by about $500 billion.
B)increased by about $13 trillion.
C)decreased by about $600 billion.
D)decreased by about $7 trillion.

Question 32

Which of the following financial institutions was NOT bailed out by the federal government during the financial crisis of 2008-2009?

A)J.P.Morgan Chase
B)A.I.G.
C)Lehman Brothers
D)Goldman Sachs

Question 33

When there is a stock market crash

A)consumption and investment rise.
B)consumption rises and investment falls.
C)consumption falls and investment rises.
D)consumption and investment fall.

Question 34

When there is a run up in stock prices

A)saving increases.
B)investment increases.
C)inflation increases.
D)interest rates decrease.

Question 35

A person who strongly wishes to avoid risk would pick which of the following choices?

A)a 50% chance of winning $750 or a 50% chance of winning $0
B)a 100% of getting $375
C)a 50% chance of getting $750,25% chance of getting &1,500 and a 25% chance of losing $1,500
D)All of the above are equal to a person who wishes to avoid risk.

Question 36

When there is a stock market boom

A)wealth and investment rise.
B)wealth rises and investment falls.
C)wealth falls and investment rises.
D)wealth and investment fall.

Question 37

Which of the following chances has the biggest expected return?

A)a 40% chance of winning $200 and a 60% chance of winning $0
B)a 100% chance of getting $100
C)a 50% chance of winning $200,30% chance of winning $400 and a 20% chance of losing $400
D)All of the above have the same expected return.

Question 38

If interest rates are positive,which of the following has the highest current value

A)$350 a year from now.
B)$350 now.
C)$350 two years from now.
D)All of the above have the same current value.

Question 39

A boom in the stock market affects the economy because

A)wealth of households grow as the stock market booms.
B)brokers make a lot of money.
C)the Fed feels it can increase the money supply without worry.
D)the stock market boom takes pressure off social security.

Question 40

Between the second quarter of 2006 and the first quarter of 2009,the value of housing wealth

A)increased by about $500 billion.
B)increased by about $13 trillion.
C)decreased by about $600 billion.
D)decreased by about $7 trillion.

Question 41

The Dow-Jones Industrial Average index is the broadest U.S.stock market index.

Question 42

If the federal government ________ during the financial crisis of 2008-2009,the negative wealth effect would likely have been larger.

A)had bailed out the large financial institutions
B)had not allowed the large financial institutions to declare bankruptcy
C)had not bailed out the large financial institutions
D)had allowed the sale of the large financial institutions to foreign investors

Question 43

If the federal government had not bailed out the large financial institutions during the financial crisis of 2008-2009,

A)the rise in overall stock prices would likely have been smaller.
B)the rise in overall stock prices would likely have been larger.
C)the fall in overall stock prices would likely have been smaller.
D)the fall in overall stock prices would likely have been larger.

Question 44

A stock is part ownership in the company.

Question 45

During the financial crisis of 2008-2009,the U.S.government bailed out Lehman Brothers.

Question 46

If the stock market crashes,consumption will fall.

Question 47

A stock market boom increases wealth and thus consumption.

Question 48

If the stock market booms,investment will rise.

Question 49

The Standard & Poor's 500 index is a broad index of the 500 largest firms from the New York Stock Exchange,the NASDAQ stock market and the American Stock Exchange.

Question 50

When there is a stock market boom,stockholders have capital losses.

Question 51

A stock bubble exists when the price of a stock is greater than the discounted value of its expected future dividends.

Question 52

A bond holder is part owner of the firm.

Question 53

Corporations are required to pay dividends.

Question 54

A stock market boom leads to greater investment by firms.

Question 55

A stock market boom increases wealth and thus saving.

Question 56

If the risk associated with the business of a company rises,then its stock price will rise.

Question 57

Between the first quarter of 2000 and the first quarter of 2006,the value of housing wealth decreased by about $600 billion per quarter.

Question 58

If the stock market crashes,then the economy will go into a recession.

Question 59

A bond is a debt of the issuer.

Question 60

A stock bubble is against insider trading laws and if you participate in one you can be arrested.

Question 61

The recognition lag of stabilization policy represents

A)the time that is necessary to put the desired policy into effect.
B)the time needed for the Federal Reserve Board to meet.
C)the time that it takes for the economy to adjust to the new conditions after a new policy is introduced.
D)the time that it takes for policy makers to recognize a change in the economy.

Question 62

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If policy makers decide on a policy at point t3 but it does not affect the economy until period t6,then the policy choice is likely to be

A)inappropriate.
B)optimal.
C)ineffective.
D)none of the above

Question 63

Economic policy may be inappropriate when it takes effect for all of the following reasons EXCEPT

A)recognition lags.
B)implementation lags.
C)response lags.
D)anticipation lags.

Question 64

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If policy makers decide at time t5 that the economy is expanding too fast,but the policy changes start affecting the economy at t7,then the policy will be

A)inappropriate.
B)well timed.
C)ineffective.
D)optimal.

Question 65

If the federal government had not bailed out the large financial institutions during the financial crisis of 2008-2009,the negative wealth effect would likely have been larger.

Question 66

The time it takes the Fed or Congress to change economic policy is

A)a recognition lag.
B)an implementation lag.
C)a response lag.
D)none of the above

Question 67

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If policy makers decide on a policy at point t3 but it does not affect the economy until period t6,then the policy choice is likely to be

A)stabilizing.
B)destabilizing.
C)optimal.
D)automatically stabilizing.

Question 68

If the government spending multiplier were 3.5,a $2 billion decrease in government spending would lower GDP by

A)$70 billion after one year.
B)$2 billion after two years.
C)$1.5 billion after one year.
D)$7 billion after one year.

Question 69

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If the condition of the economy at point E is realized by policy makers when the economy is at point G,policy is likely to be inappropriate due to

A)crowding out.
B)the recognition lag.
C)the implementation lag.
D)the response lag.

Question 70

Time lags that often erode effectiveness of monetary and fiscal policy measures represent

A)the change in export and import prices.
B)the foreign response to price changes.
C)delays in the response of the economy to stabilization policy.
D)the change in exchange rates.

Question 71

The implementation lag of stabilization policy represents

A)the time that is necessary to put the desired policy into effect once economists and policy makers recognize the need.
B)the time needed for the economy to adjust to new conditions after new policies are introduced.
C)the time needed for the Federal Reserve to meet.
D)the time that is needed for policy makers to recognize the need to do something.

Question 72

The time it takes for a new economic policy to affect behavior in the economy is

A)a recognition lag.
B)an implementation lag.
C)a response lag.
D)none of the above

Question 73

The time it takes to see if that there has been a shock to the economy is

A)a recognition lag.
B)an implementation lag.
C)a response lag.
D)none of the above

Question 74

The implementation lag for fiscal policy is longer than for monetary policy because

A)it takes longer for the Fed to act than Congress.
B)it takes longer for Congress to act than the Fed.
C)fiscal policy changes more quickly affect behavior than monetary policy changes.
D)monetary policy changes more quickly affect behavior than fiscal policy changes.

Question 75

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.Suppose it takes policy makers from time t2 to time t4 to take an action to stimulate the economy.This is an example of

A)cyclical lag.
B)recognition lag.
C)implementation lag.
D)response lag.

Question 76

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If the economy is actually at Point C but policy makers think that it is still at Point B,this is an example of

A)economic policies ineffectiveness.
B)recognition lag.
C)implementation lag.
D)response lag.

Question 77

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.If policy makers take an action at time t4,the impact on the economy will not be at time t4 because

A)economic policies are ineffective.
B)of the recognition lag.
C)of the implementation lag.
D)of the response lag.

Question 78

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Figure 15.1
Refer to Figure 15.1.Suppose it takes policy makers from time t2 to time t3 to see that the economy has started contracting.This is an example of

A)a recognition lag.
B)an implementation lag.
C)a response lag.
D)a policy lag.

Question 79

The implementation lag for fiscal policy is

A)shorter than the implementation lag for monetary policy.
B)longer than the implementation lag for monetary policy.
C)the same length a the implementation lag for monetary policy.
D)the same length as the recognition lag for fiscal policy.

Question 80

Policy lags mean that

A)economic policy may be inappropriate when it takes affect.
B)economic policy will be ineffective.
C)fiscal policy is more effective than monetary policy.
D)monetary policy is more effective than fiscal policy.