Question 1

An economy suffering from high inflation despite low economic growth and high unemployment is experiencing:

Accepted Answer

A)   stagflation.
B)   an economic boom.
C)   an economic downturn.
D)   hyperinflation.E) A) and B)
F) C) and D)

Question 2

The worst financial crisis in history was the:

Accepted Answer

A)   Great Crash of 1929.
B)   South Seas bubble.
C)   Great Recession.
D)   housing bubble of 2007.E) A) and B)
F) A) and C)

Question 3

In events leading to the collapse of the housing bubble, inflated home values created a:

Accepted Answer

A)   wealthier economy, which caused economic growth.
B)   false sense of wealth, which increased aggregate demand.
C)   false sense of wealth, which spurred economic growth to decrease.
D)   wealthier economy, which caused inflation.E) None of the above
F) C) and D)

Question 4

Stagflation is:

Accepted Answer

A)   high inflation despite low economic growth and low unemployment.
B)   low economic growth, despite low inflation and low unemployment.
C)   high unemployment, despite low inflation and low economic growth.
D)   high inflation along with low economic growth and high unemployment.E) A) and B)
F) B) and D)

Question 5

In response to the financial crisis which followed the housing bubble collapse, policy-makers feared stimulating demand would cause:

Accepted Answer

A)   inflation.
B)   deflation.
C)   stagflation.
D)   hyperinflation.E) A) and B)
F) B) and C)

Question 6

Leveraging investments based on irrational expectations:

Accepted Answer

A)   can lead to gradually deflating financial bubbles.
B)   is cited as a root cause of financial crises.
C)   explains the success of companies like Apple.
D)   All of these statements are true.E) A) and C)
F) A) and B)

Question 7

When financial markets are __________, leverage ______________; when they are _______, leverage ____________.

Accepted Answer

A)   booming; multiplies the gains; crashing; magnifies the losses
B)   booming; magnifies the losses; crashing; multiplies the gains
C)   crashing; mitigates the losses; booming; mitigates the gains
D)   crashing; magnifies the losses; booming; mitigates the gainsE) None of the above
F) B) and C) A

Question 8

Which of the following is not a reason why aggregate demand decreased following the housing bubble collapse?

Accepted Answer

A)   People stopped investing in homes.
B)   Consumption decreased.
C)   Business investment decreased.
D)   Costs of production increased throughout the economy.E) B) and C)
F) A) and B)

Question 9

As a result of the housing market crash overall output fell, and prices:

Accepted Answer

A)   decreased because the magnitude of shift was larger for aggregate demand than it was for aggregate supply.
B)   increased because the magnitude of shift was larger for aggregate demand than it was for aggregate supply.
C)   decreased because the magnitude of shift was smaller for aggregate demand than it was for aggregate supply.
D)   increased because the magnitude of shift was smaller for aggregate demand than it was for aggregate supply.E) A) and C)
F) C) and D)

Question 10

After World War II, which of the following about the value of homes is not true?

Accepted Answer

A)   On average they did not fall for 60 years.
B)   They were unaffected by recessions until the 2000s.
C)   They seemed immune to the business cycle.
D)   It remained relatively unaffected by inflation.E) A) and B)
F) A) and C)

Question 11

If you lost 20 percent on $100 worth of stock in a 2x margin account, then you would:

Accepted Answer

A)   lose $20.
B)   gain $20.
C)   lose $40.
D)   gain $40.E) None of the above
F) All of the above

Question 12

One reason the housing bubble occurred is because the:

Accepted Answer

A)   securitization of mortgages meant more mortgages were low-risk, attracting investors.
B)   herd instinct caused everyone to stop buying homes.
C)   recency effect affected people's perceptions of home values.
D)   All of these statements are true.E) C) and D)
F) B) and C) C

Question 13

As a result of the housing-market crash:

Accepted Answer

A)   both aggregate demand and aggregate supply shifted to the left.
B)   both aggregate demand and aggregate supply shifted to the right.
C)   aggregate demand shifted to the left, and aggregate supply shifted to the right.
D)   aggregate demand shifted to the right, and aggregate supply shifted to the left.E) None of the above
F) All of the above

Question 14

Banks became more willing to make subprime loans because of:

Accepted Answer

A)   securitization.
B)   leveraging.
C)   hedging.
D)   herd behavior.E) None of the above
F) A) and B)

Question 15

The stock market crash of 1929 may have been avoided if:

Accepted Answer

A)   investors had acted rationally.
B)   investors had acted irrationally.
C)   large companies had been more objective in their decision making.
D)   large companies had been more emotional in their decision making.E) All of the above
F) B) and C)

Question 16

The practice of dividing packages of debts into slices, each with different risk and return characteristics, is called:

Accepted Answer

A)   leveraging.
B)   bundling.
C)   pooling.
D)   tranching.E) B) and C)
F) All of the above

Question 17

The financial crisis that began in late 2007 ended which era?

Accepted Answer

A)   The Great Recovery
B)   The Golden era
C)   The Great Moderation
D)   The Great RecessionE) A) and D)
F) A) and C)

Question 18

Tranching makes it so that packages of reliable, low-risk mortgages could be sold to ______________, while higher-risk subprime mortgages could be sold to ___________.

Accepted Answer

A)   more risk-averse investors; risk-loving investors
B)   more risk-loving investors; risk-averse investors
C)   national banks; local banks
D)   local banks; the governmentE) B) and D)
F) None of the above

Question 19

The decrease in investment that occurred as a result of banks being unwilling to lend to businesses after the collapse of the housing bubble caused aggregate:

Accepted Answer

A)   demand to increase.
B)   demand to decrease.
C)   supply to increase.
D)   supply to decrease.E) A) and B)
F) None of the above B

Question 20

When investors follow a "herd instinct," they make decisions:

Accepted Answer

A)   based on hearsay, not objective information.
B)   based on emotion, not objective information.
C)   as a group, inflating the prices of goods somewhat arbitrarily.
D)   based on the sound logic of a group, rather than the individual.E) All of the above
F) A) and C)

Exam 17: Financial Crisis

An economy suffering from high inflation despite low economic growth and high unemployment is experiencing:

Correct AnswerverifiedShow Answer

The worst financial crisis in history was the:

Correct AnswerverifiedShow Answer

In events leading to the collapse of the housing bubble, inflated home values created a:

Correct AnswerverifiedShow Answer

Stagflation is:

Correct AnswerverifiedShow Answer

In response to the financial crisis which followed the housing bubble collapse, policy-makers feared stimulating demand would cause:

Correct AnswerverifiedShow Answer

Leveraging investments based on irrational expectations:

Correct AnswerverifiedShow Answer

When financial markets are __________, leverage ______________; when they are _______, leverage ____________.

Correct AnswerverifiedA

Which of the following is not a reason why aggregate demand decreased following the housing bubble collapse?

Correct AnswerverifiedShow Answer

As a result of the housing market crash overall output fell, and prices:

Correct AnswerverifiedShow Answer

After World War II, which of the following about the value of homes is not true?

Correct AnswerverifiedShow Answer

If you lost 20 percent on $100 worth of stock in a 2x margin account, then you would:

Correct AnswerverifiedShow Answer

One reason the housing bubble occurred is because the:

Correct AnswerverifiedC

As a result of the housing-market crash:

Correct AnswerverifiedShow Answer

Banks became more willing to make subprime loans because of:

Correct AnswerverifiedShow Answer

The stock market crash of 1929 may have been avoided if:

Correct AnswerverifiedShow Answer

The practice of dividing packages of debts into slices, each with different risk and return characteristics, is called:

Correct AnswerverifiedShow Answer

The financial crisis that began in late 2007 ended which era?

Correct AnswerverifiedShow Answer

Tranching makes it so that packages of reliable, low-risk mortgages could be sold to ______________, while higher-risk subprime mortgages could be sold to ___________.

Correct AnswerverifiedShow Answer

The decrease in investment that occurred as a result of banks being unwilling to lend to businesses after the collapse of the housing bubble caused aggregate:

Correct AnswerverifiedB

When investors follow a "herd instinct," they make decisions:

Correct AnswerverifiedShow Answer

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When financial markets are , leverage ; when they are _, leverage __________.

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A

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C

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Tranching makes it so that packages of reliable, low-risk mortgages could be sold to ____, while higher-risk subprime mortgages could be sold to _.

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B

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