Deck 10: The Great Recession: a First Look

Question 1

In ________, housing prices collapsed following a decade of rapid increase.

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

Answer 1

2006

Question 2

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

Answer 2

commercial bonds

Question 3

A recent financial crisis occurred in:

A) Mexico in 1994.
B) India in 1972.
C) Russia in 2005.
D) China in 1994.
E) Norway in 2000.

Answer 3

Mexico in 1994.

Question 4

Federal debt as a ratio to GDP ________ between 2007 and 2012, from ________ percent to ________ percent.

A) doubled; 36; 72
B) tripled; 27; 81
C) fell; 82; 41
D) doubled; 80; 160
E) tripled; 10; 30

Question 5

Which investment bank collapsed in September 2008?

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

Question 6

What is the Federal Funds rate?

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

Question 7

Between the middle of 2006 and the first quarter of 2012, the national index for the U.S. housing market:

A) declined by about 10.1 percent.
B) declined by about 42 percent.
C) increased by about 33 percent.
D) was flat.
E) grew at the rate of inflation.

Question 8

The housing bubble was NOT fueled by which of the following factors:

A) loosening lending standards.
B) high unemployment.
C) low interest rates.
D) subprime lending.
E) demand pressures.

Question 9

The name given to low-quality loans is:

A) fixed-income loans.
B) opportunity loans.
C) ARM 7/1.
D) subprime loans.
E) "sucker loans."

Question 10

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 11

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 12

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 13

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.

Question 14

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

A) 1981-1982
B) 2007-2009
C) 1973-1975
D) 1948-1949
E) 1969-1970

Question 15

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

A) Mexico
B) Russia
C) Brazil
D) India
E) Argentina

Question 16

Between May 2004 and May 2006, the Federal Reserve ________ 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 17

What declined during the Great Recession?

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

Question 18

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

A) Wells Fargo
B) Goldman Sachs
C) the National Bureau of Economic Holdings
D) Citicorp
E) the Federal Reserve

Question 19

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 20

During the Great Recession, the unemployment rate peaked at ________ percent.

A) 12.1
B) 9.5
C) 10
D) 25.8
E) 6.7

Question 21

A supposition of mortgage securitization is that:

A) mortgages can be swapped for T-bills.
B) the federal government guarantees all loans.
C) all the mortgages were "high quality."
D) the underlying assets are rated AAA.
E) a large fraction of loans will not go bad at the same time.

Question 22

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 23

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 24

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 U.S. T-bill yield and LIBOR rate
D) the spread between inflation-indexed and nonindexed U.S. bonds
E) the number of banks applying for federal assistance

Question 25

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

A) Freddie Mac
B) Bank of America
C) Lehman Brothers
D) Merrill Lynch
E) Fifth Third Bank

Question 26

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 27

The majority of mortgage-backed securities were held by:

A) large commercial and investment banks.
B) the Fed.
C) the federal government.
D) large teacher pension funds.
E) money market mutual funds.

Question 28

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 29

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

A) Total nonfarm 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 30

The spread between three-month LIBOR and three-month bond yields ________ of/at________ percent after ________.

A) rose to a high; 1.0; the collapse of Merrill Lynch
B) fell to a low; 0.0; the Fed opened the discount window to investment banks
C) rose to a high; 10; the S&P 500 index fell by 250 points
D) rose to a high; 3.5; the collapse of Lehman Brothers
E) remained unchanged; 2.0; the rescue of Fannie Mae and Freddie Mac

Question 31

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

A) affected almost every financial institution; the 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 32

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 33

The goal of securitization is to:

A) lock a constant rate of return for up to 10 years.
B) ensure one financial institution holds all the risk.
C) diversify risk by buying different classes of assets.
D) sell paper to Fannie Mae and/or Freddie Mac.
E) earn high returns for investors.

Question 34

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

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

Question 35

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 below -7 percent
D) equaled zero; fell to -2 percent
E) was rising; unemployment was 8 percent

Question 36

After the Fed began to raise the federal funds rate in 2004:

A) investors quickly sold U.S. treasuries.
B) default on subprime mortgages increased.
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 37

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 remained unchanged.
E) aggregate supply increased.

Question 38

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 below -7 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 39

The "flight to safety" in the fall of 2007 led investors to ________, which led to ________.

A) buy BAA rated corporate bonds; a decline in stock prices
B) buy T-bills; a rise in the spread between LIBOR rates and T-bill yields
C) purchase stocks; a sharp increase in the S&P 500
D) oil futures; a spike in natural gas prices
E) buy foreign exchanges; a rapid appreciation of the euro

Question 40

The ________ was hastily designed to ________ in September 2008.

A) Troubled Asset Relief Program; prevent financial collapse
B) American Recovery and Reinvestment Act; prevent fiscal 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 41

IMF studies conducted after the financial crisis projected negative growth in:

A) Italy.
B) Japan.
C) the United Kingdom.
D) China.
E) Brazil.

Question 42

Refer to the following table when answering the following questions.
Table 10.2: Hypothetical Bank Sheet ($ millions)

-The bank's assets are equal to:

A) $9,000.
B) $2,000.
C) $11,600.
D) -$700.
E) Not enough information is given.

Question 43

The following table shows real GDP and potential real GDP for the years 2005-2015. Refer to this table when answering the following questions.
Table 10.1 ($ billions) (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
During which year was the economy in an expansionary gap?

A) 2001
B) 2004
C) 2002
D) 2003
E) none of the above

Question 44

According to the IMF, which of these countries experienced negative growth in 2015, six years after the crisis?

A) India
B) the United States
C) the United Kingdom
D) Italy
E) Brazil

Question 45

Which of the following is/are NOT (an) asset(s) on a bank's balance sheet?

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

Question 46

Refer to the following table when answering the following questions.
Table 10.2: Hypothetical Bank Sheet ($ millions)

-The bank's assets are equal to ________ and liabilities are ________.

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

Question 47

When was the recession deepest?

A) 2005
B) 2007
C) 2009
D) 2008
E) Not enough information is given.

Question 48

In a typical recession, generally only ________ expenditure rises.

A) investment
B) export
C) import
D) inflation
E) government

Question 49

Refer to the following table when answering the following questions.
Table 10.2: Hypothetical Bank Sheet ($ millions)

-The bank's net worth is equal to:

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

Question 50

The sharp swing in core inflation in 2008-2009 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 51

Refer to the following table when answering the following questions.
Table 10.2: Hypothetical Bank Sheet ($ millions)

-This bank's liabilities are equal to:

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

Question 52

The average decline in GDP growth for all recessions 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; 4.7
E) 0; 2.2

Question 53

Which of the following countries did the financial crisis affect?

A) the United States
B) Germany
C) Japan
D) France
E) All of these answers are correct.

Question 54

The following table shows real GDP and potential real GDP for the years 2005-2015. Refer to this table when answering the following questions.
Table 10.1 ($ billions) (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-About how much did short-run output equal in 2009 and 2015, respectively?

A) -6.4 percent; -2.0 percent
B) 6.9 percent; 2.1 percent
C) 93.6 percent; 98.0 percent
D) 106.9 percent; 102.1 percent
E) Not enough information is given.

Question 55

Refer to the following table when answering the following questions.
Table 10.2: Hypothetical Bank Sheet ($ millions)
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 is given.

Question 56

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

A) India
B) the United States
C) the United Kingdom
D) Italy
E) Brazil

Question 57

From a low of ________ percent in 2007, the unemployment rate rose to ________ percent by 2010.

A) 10; 25
B) 58; 63
C) 0; 7
D) 4.4; 10
E) 7; 12

Question 58

The following table shows real GDP and potential real GDP for the years 2005-2015. Refer to this table when answering the following questions.
Table 10.1 ($ billions) (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

-About how much did short-run output fluctuations equal in 2005 and 2009, respectively?

A) -0.3 percent; -2.4 percent
B) 0.22 percent; -6.4 percent
C) -33 percent; 323.1 percent
D) 86.1 percent; 83.8 percent
E) Not enough information is given.

Question 59

In terms of loss of employment, which recession in the post-World War II period saw the greatest losses?

A) 2007-2009
B) 1981-1982
C) 2001
D) 1973-1975
E) 1953-1954

Question 60

One of the key differences between the United States and the European euro area countries in the aftermath of the Great Recession is that:

A) U.S. inflation and unemployment are both about 4 percent, and in Europe, they are about 8 percent.
B) GDP growth in the United States is negative, but European growth rates are higher than normal.
C) inflation in the United States is negative, while Europe has extremely high inflation rates.
D) the U.S. unemployment rate has largely returned to prerecession levels, whereas European unemployment is still above prerecession levels.
E) interest rates in the United States have risen sharply, while those in the euro area are negative.

Question 61

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

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

Question 62

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 63

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 total liabilities.

Question 64

The following figure shows the daily three-month treasury yield in September 2008. Refer to the following figure when answering the following questions.
Figure 10.1: Daily Three-Month Treasury Yield: 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 65

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 is given.

Question 66

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 30-year-fixed mortgages.
E) lending money in return for short-term debt.

Question 67

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 68

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 69

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 70

The following figure shows the daily three-month treasury yield in September 2008. Refer to the following figure when answering the following questions.
Figure 10.1: Daily Three-Month Treasury Yield: 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) General Motors and Chrysler declared bankruptcy.

Question 71

If the value of this bank's investments decreases 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 is given.

Question 72

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

A) unfunded.
B) overleveraged.
C) already insolvent.
D) nationalized.
E) illiquid.

Question 73

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

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

Question 74

In the last months of 2008 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; remained unchanged

Question 75

In what year was the Federal Deposit Insurance Corporation established?

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

Question 76

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 77

If the value of this bank's investments decreases by $1,000, what is the approximate leverage ratio of this bank?

A) 9.60
B) 3.87
C) 8.60
D) 2.78
E) Not enough information is given.

Question 78

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 79

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 80

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 is given.