Question 1

Even without policy responses, the self-correcting mechanism suggests that LRAS will eventually return to its pre-GFC level.

Accepted Answer

The self-correcting mechanism suggests that the economy will return to its natural level of output, but it does not guarantee that the Long-Run Aggregate Supply (LRAS) will return to its pre-Great Financial Crisis (GFC) level, as structural changes and other factors can permanently affect the LRAS.

Question 2

Liquidity trap refers to a situation in which even zero short-term interest rates fail to stimulate the economy due to households and banks hoarding cash.

Accepted Answer

In a liquidity trap, households and banks prefer to hold cash instead of investing or lending it, which makes monetary policy ineffective in stimulating the economy. This can lead to persistent low inflation and economic stagnation.

Question 3

Which of the following is an optimal macroeconomic policy to the GFC shocks?

Accepted Answer

In response to the GFC shocks, an increase in transfer payments would be optimal. This would help to support aggregate demand, stimulate economic growth and employment, and mitigate the effects of the recession. A decrease in government expenditures, such as through austerity measures, would likely worsen the recession by reducing aggregate demand even further. Increasing the interest rate would make borrowing more expensive, which is counterproductive in stimulating economic growth. A decrease in the inflation target may help to stabilize prices, but this would not have as significant impact on addressing the GFC shocks.

Question 4

The optimal policy response to the GFC shocks involves the use of a(n) _____ fiscal policy and a(n) _____ monetary policy.

Accepted Answer

The optimal policy response to the Global Financial Crisis (GFC) shocks involves the use of both expansionary fiscal policy and expansionary monetary policy. Expansionary fiscal policy involves increasing government spending and/or decreasing taxes to stimulate the economy, while expansionary monetary policy involves actions by central banks to increase the money supply and lower interest rates, also aiming to stimulate economic activity.

Question 5

Fiscal policy is a more effective policy response than monetary policy in dealing with the GFC.

Accepted Answer

Fiscal policy, which involves government spending and taxation, can be effective in stimulating demand during a downturn, but during the Global Financial Crisis (GFC), monetary policy, including lowering interest rates and quantitative easing, played a crucial role in stabilizing financial markets and providing the liquidity needed to support economies. Both policies were important, but the immediate and widespread impact of monetary policy measures was critical in addressing the financial aspects of the GFC.

Question 6

Subprime borrower refers to an individual with high credit ratings and above average income.

Accepted Answer

Subprime borrowers have lower credit ratings and income levels, which makes them less likely to be approved for loans and can result in higher interest rates and fees.

Question 7

House prices decline was one of the main causes for the Global Financial Crisis (GFC).

Accepted Answer

The decline in house prices led to a decrease in the value of mortgage-backed securities, which were a major component in many banks' portfolios. This caused significant losses for financial institutions and ultimately contributed to the GFC.

Question 8

The GFC was caused by a combination of _____.

Accepted Answer

The Global Financial Crisis (GFC) was primarily caused by a combination of a negative aggregate demand (AD) shock and a negative long-run aggregate supply (LRAS) shock. The negative AD shock was due to a decrease in consumer and business spending, while the negative LRAS shock was related to a decrease in the economy's productive capacity, partly due to financial system disruptions.

Question 9

Government should bailout all private companies and banks when they are in trouble, not only those too-big-to fail ones.

Accepted Answer

It is not necessary to bailout all private companies and banks when they are in trouble. Bailouts should be reserved for companies that are considered too big to fail, as their collapse may have a significant impact on the overall economy. Other companies that are not too big to fail may need to undergo bankruptcy or reorganization processes to address their financial problems.

Question 10

Quantitative easing refers to unconventional monetary policy of the central bank selling financial assets to private institutions in an attempt to increase money supply and lower long-term interest rates.

Accepted Answer

Quantitative easing involves the central bank buying financial assets, not selling them, in order to increase money supply and lower long-term interest rates.

Question 11

Mortgage securitisation refers the process of bundling many mortgage loans together and converting them into tradeable financial instruments (debt securities).

Accepted Answer

Mortgage securitisation does involve bundling many mortgage loans together and converting them into tradeable financial instruments.

Question 12

Which of the following is not related to the propagation of the GFC?

Accepted Answer

The booming Chinese economy is not related to the propagation of the GFC, as it was primarily caused by problems in the US financial system and the securitised mortgages it created. While the global economic slowdown sparked by the GFC may have had some impact on China, it was not a direct cause of the crisis itself.

Question 13

Quantitative easing refers to _____.

Accepted Answer

Quantitative easing is a monetary policy in which a central bank buys financial assets from private institutions, such as commercial banks and insurance companies, with the aim of increasing money supply and lowering long-term interest rates. This is done in order to stimulate economic growth and reduce the risk of deflation.

Question 14

A rescue operation in which the government provides necessary funding to prevent a certain company's bankruptcy is also known as:

Accepted Answer

A government bailout is a financial assistance program that is provided by a government to prevent the bankruptcy of a company or a sector, usually in times of economic crisis or recession. This involves the provision of financial aid or loans to companies in distress in order to avoid collapse and prevent negative consequences for the broader economy.

Question 15

Liquidity trap refers to a situation in which _____.

Accepted Answer

In a liquidity trap, even zero short-term nominal interest rates fail to stimulate the economy due to households and banks hoarding cash. This happens because people and banks become risk-averse and prefer to hold onto cash instead of investing it, even if the interest rates are zero. This results in a decrease in both consumption and investment, which can lead to deflationary pressures in the economy.

Question 16

The nature of the Global Financial Crisis (GFC) was primarily a negative short-run aggregate supply shock.

Accepted Answer

The GFC was primarily a negative demand shock, as there was a significant decrease in consumer and investor confidence, leading to reduced spending and investment. This resulted in decreased aggregate demand and output. While there were some supply-side factors such as the subprime mortgage crisis and subsequent collapse of the housing market, the overall impact was primarily demand-driven.

Question 17

It was pure luck that Australia got through the GFC almost unharmed.

Accepted Answer

Australia's resilience during the Global Financial Crisis (GFC) was not just luck; it was due to a combination of factors including a strong banking sector, effective fiscal stimulus by the government, and high demand for commodities from China.

Question 18

Deleveraging is a process of reducing indebtedness and was even more pronounced at the level of companies and countries.

Accepted Answer

Deleveraging is indeed a process of reducing indebtedness, and it is often seen at both the company and country levels.

Question 19

The political push for affordable housing created a housing bubble and laid the foundation for the GFC.

Accepted Answer

The political push for affordable housing led to policies and lending practices that relaxed credit standards, leading to the subprime mortgage crisis and the eventual collapse of the housing market, which triggered the 2008 global financial crisis.

Question 20

The situation describing a large financial company whose bankruptcy would be too costly to the financial system and economy is called:

Accepted Answer

The term "too-big-to-fail" refers to a situation where a large financial company becomes so important and interconnected to the financial system that its failure would have serious ripple effects on the economy. In this case, the government may feel compelled to intervene in order to prevent the company from failing, as its bankruptcy would be too costly to the financial system and the wider economy. This typically involves some form of government assistance or bailout to keep the company afloat.

Quiz 36: Global Financial Crisis of 2008 and Beyond