Deck 36: Global Financial Crisis of 2008 and Beyond

Question 1

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

Answer 1

False

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.

Answer 2

True

Question 3

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

A)an increase in transfer payments
B)an increase in the interest rate
C)a decrease in the inflation target
D)a decrease in government expenditures

Answer 3

A

Question 4

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

A)expansionary; expansionary
B)expansionary; contractionary
C)contractionary; contractionary
D)expansionary, contractionary

Question 5

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

Question 6

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

Question 7

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

Question 8

The GFC was caused by a combination of _____.

A)a negative AD shock and a negative LRAS shock
B)a negative AD shock and a positive LRAS shock
C)a positive AD shock and a positive LRAS shock
D)a positive AD shock and a negative LRAS shock

Question 9

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

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.

Question 11

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

Question 12

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

A)house prices decline
B)problems of securitised mortgages
C)panic in the financial markets
D)a booming Chinese economy

Question 13

Quantitative easing refers to _____.

A)the central bank buying financial assets to private institutions in an attempt to increase money supply and lower long-term interest rates
B)the central bank selling financial assets to private institutions in an attempt to increase money supply and lower long-term interest rates
C)the central bank buying financial assets to private institutions in an attempt to reduce money supply and lower long-term interest rates
D)the central bank selling financial assets to private institutions in an attempt to increase money supply and raise long-term interest rates

Question 14

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

A)government bailout
B)quantitative easing
C)open-market operation
D)deleveraging

Question 15

Liquidity trap refers to a situation in which _____.

A)even zero short-term nominal interest rates fail to stimulate the economy due to households and banks hoarding cash
B)zero short-term nominal interest rates stimulate the economy due to additional borrowing from households and banks
C)negative short-term nominal interest rates fail to stimulate the economy due to households and banks hoarding cash
D)Neither households nor banks want to hold cash

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

A)government bailout
B)quantitative easing
C)open-market operation
D)too-big-to-fail

Question 21

Interpret the events occurred during the Global Financial Crisis (GFC).

Question 22

_____ refers to a debt instrument backed up by some underlying asset.

A)collateralised debt obligation
B)credit default swap
C)loanable fund
D)hedge fund

Question 23

_____ was implemented in several countries as a recourse around _____.

A)Quantitative easing; liquidity traps
B)Quantitative easing; crowding out
C)Government bailout; crowding out
D)Government bailout; illiquidity traps

Question 24

Substantial increases in residential real estate prices that do not reflect their fundamental value, and are therefore likely to go down sharply in the future is referred to as _____.

A)a housing bubble
B)a booming housing market
C)a housing fad
D)housing fundamental

Question 25

Without policy responses, the GFC is likely to _____.

A)reduce the potential output of the affected economies
B)exert no impact on the potential output of the affected economies
C)raise the potential output of the affected economies
D)raise the aggregate demand of the affected economies

Question 26

Fiscal stimulus packages shifts the aggregate demand curve to the _____, which is designed to _____ output at the expense of a higher inflation rate.

A)right; raise
B)left; reduce
C)right; reduce
D)left; raise

Question 27

An insurance contract on a collateralised debt obligation (CDO) promising to cover any shortfall in the CDO income stream is referred to as _____.

A)credit default swap
B)interest rate swap
C)currency swap
D)convertible bond

Question 28

Describe some of the lessons learned from the Global Financial Crisis (GFC).

Question 29

Housing bubbles can arise from _____.

A)high interest rate
B)excess loanable funds
C)expansionary fiscal policy
D)low money supply

Question 30

Monetary policy responses were rendered ineffective at the height of the GFC in several countries because these countries were caught in _____.

A)a liquidity trap
B)a crowding out effect
C)an illiquidity trap
D)a monetary policy gap

Question 31

The global saving glut contributes to large current account _____ in the recipient countries of loanable funds.

A)deficits
B)surpluses
C)balances
D)items

Question 32

Explain why the economy's potential output is unlikely to return to its pre-GFC level without policy responses.

Question 33

The global saving glut contributes to large current account _____ in the contributing countries of loanable funds.

A)deficits
B)surpluses
C)balances
D)items

Question 34

Identify key propagation mechanisms of the Global Financial Crisis (GFC).

Question 35

Fiscal stimulus packages refer to _____.

A)an increase in government expenditures
B)a decrease in government expenditures
C)an increase in money supply
D)a decrease in the nominal interest rate

Question 36

Which of the following is not a lesson learned from the GFC?

A)avoid excessive leveraging
B)assess the risk of each asset class
C)regulate too-big-to-fail institutions
D)eliminate crowding out from excessive government expenditures

Question 37

Discuss some of the reasons behind Australia's experience during the Global Financial Crisis (GFC).